Auto loans

Auto dealers borrow money to purchase inventory. A typical dealer has a 5 million dollar loan and these are called floor plan loans. They worked together to bundle these loan request into securitized asset backed securities called ABS’s. These are then purchased by various institutional investors.

This had been working quite well until the big market collapse in late 2008. After that no one would buy these ABS’s. The government then stepped in with a program called Term Asset Backed Security Loan Facility known as TALF. This program would loan money at low interest rates to individuals or businesses so that they could buy ABS’s.

The deal was that TALF would loan money at rates ranging from .5 to 2 percent to be used to purchase floor plan loans which paid 4 to 6 percent. The government guaranteed that if the purchaser made a profit they could keep the money but if they lost the government would absorb 90% of any loss.

There were trillions loaned under the TALF program to all sorts of investors around the world but I would like to high light two of these loans. The wives of two Morgan Stanley executives, Christi Mack and Susan Karches received a TALF loan for 225 million dollars. These ladies had no previous experience in this type of investing.

It’s not what you know, it’s who you know.