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What TALF 2.0 means for investors

• A consumer takes out a loan to buy a car (for example)
• That debt is packaged with other debt into a high-grade structure (ABS, MBS, etc)
• An investor buys the asset with a non-recourse loan from the Fed, at a haircut of roughly 10% (depending on the type and term of the asset)
• The investor pays around LIBOR + 1% for the loan
• If the asset defaults, the investor can return it to the Fed in lieu of the loan

If an ABS trades at 150 over LIBOR for example, and the haircut offered is 10%, an investor could buy the ABS, use a TALF loan (at roughly LIBOR + 100) to back 90% of it, and earn roughly 50bps with only 10% exposure, equating to a 5% return on investment. By offering both leverage finance and a cap on losses, the TALF program allows investors to leverage eligible assets and earn high returns on AAA ABS without risking more capital than that invested.

TALF 1.0 was a fairly clear success after the global financial crisis. Economically, a functioning ABS market is critical for allowing credit to be extended for small loans, so supporting the ABS market helped the wider economy recover. Moreover, all loans were repaid in full either at maturity or earlier, meaning the TALF program supported the economy without a direct cost (as opposed to, say, stimulus spending). Investors also benefitted, often with double-digit IRRs.

It would be optimistic to expect returns to be as strong...Read More

Mazars comments on the Aon and Willis Towers Watson deal

Simon Fitzsimmons, Director, Mazars Deal Advisory – M&A:“Another blockbuster deal in the global insurance broking market, seeing brokers ranked 2 & 3 combine together to become the largest global insurance broker, knocking Marsh off its current perch. The CMA will no doubt deliberate on the transaction before giving its blessing (which also needs shareholder approval) – however, speculation already abounds that some of the combined divisions will need to be spun-off to appease the CMA as the market options for clients are compressed even further by this merger following that of Marsh and JLT only a year ago.

Further M&A opportunities from this deal will materialise either indirectly through chance spin-offs or directly as a result of the CMA decision, ...Read More

COVID19 and what exactly is going viral

Instead, investors should ask themselves whether they consider the situation to be a structural phenomenon or a temporary one. "I strongly believe it's not structural," says Moore. “So we should be getting to a point where markets have been overreacting, because of their extrapolation of a temporary phenomenon into a permanent one."

He continues: “The situation is quite serious, of course, and we should not forget the considerable human cost – not just those affected by the virus itself or their families, but the angst that is being shown by the broader population. And that's where it begins to affect markets because that affects economics.”

According to Columbia Threadneedle, there are short-term risks mainly relating...Read More

Milliman Protection Strategy and liability-driven investing

Lifestyle Actuary

Amy Sutherland and Raluca Stanescu interview Louise Pryor, who is a sustainability actuary and incoming President Elect of the Institute and Faculty of Actuaries (IFoA). We’ve asked Louise a few questions about her work, and were also keen to find ou...Read More

The Luddite

Sam Richardson looks into the up and coming and the outgoing of the technology and gadgetry world in 2014.

Travelling Actuary

This month's Travelling Actuary takes us to the iconic Boston to experience New England at it’s very best.

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