Pimco, Magnetar Tapped Federal Reserve's TALF Program as Bond Sales Froze

Pacific Investment Management Co., manager of the world’s largest bond fund, was among firms that tapped a Federal Reserve lending program aimed at restoring the flow of credit to consumers and small businesses, according to data released today by the New York arm of the central bank.

Pimco, based in Newport Beach, California, borrowed from the government’s Term Asset-Backed Securities Loan Facility 96 times between April 2009 and March 2010 for a total of $7.26 billion. FrontPoint Strategic Credit Investments LLC and Magnetar Funding II LLC also turned to the program for cash. A provision in the Dodd-Frank financial reform law passed in July required the data about borrowing be made public.

Federal officials created TALF in November 2008 to allow investors to borrow as much as 95 cents of every dollar they held in Fed-approved asset-backed securities. The plan pumped money into a market that bundles consumer, small business and commercial real estate debt together into bonds for sale to investors so lenders would make additional credit available. At its peak, TALF’s outstanding loans totaled $42.5 billion.

“As of September 30, 2010, more than 60 percent of the TALF loans have been repaid in full, with interest, ahead of their legal maturity dates,” the Fed said in a statement accompanying the TALF data. “All loans that have not been repaid in full early are current in their payments of principal and interest and no collateral has been surrendered in lieu of repayment.”

Collateral Option

Participants had the option of turning the securities they used as collateral over to the Fed if the value of the investments fell.

Mark Porterfield, a spokesman for Pimco, didn’t return a call seeking comment.

Magnetar Capital LLC, the hedge fund which profited from bets against mortgage securities during the financial collapse, participated in the program through Magnetar Funding II, which borrowed about $1.05 billion through seven TALF transactions.

“Magnetar participated in the program on the same terms as the hundreds of other participants in the TALF program, by Magnetar providing ‘first loss’ risk capital in these markets,” Steven Lipin, a spokesman for the Evanston, Illinois-based firm, said in an e-mail.

FrontPoint Partners, a hedge fund unit of New York-based Morgan Stanley, used the facility 48 times through its FrontPoint Strategic Credit Investments for a total of $1.09 billion.

Support The Government

“On behalf of clients, FrontPoint was an early participant in the government TALF program,” Steve Bruce, a spokesman for the firm said in an e-mailed statement. “With our clients, we were able to support the government in this important initiative.”

The California Public Employees’ Retirement System borrowed at least $5.4 billion under the program. The pension fund then invested in securities backed by Citibank Inc. credit card receivables.

The Fed started TALF in part to provide low-cost funding for investors who wanted to buy asset-backed securities. Ellen Hughes-Cromwick, Ford Motor Co.’s chief economist, cited the program for helping revive auto sales.

AAA rated bonds backed by automobile loans and maturing in three years were trading at yields of 600 basis points more than the London interbank offered rate when the Fed created TALF. The spread was up from 90 basis points, 0.9 percentage points, at the beginning of that year.

The government expanded the program in February 2009 to allow investors to use the money to purchase commercial mortgage-backed bonds packaged before the financial crisis. The securities could be bought in the secondary market as long as the buyer obtained them through an arm’s-length transaction with an unrelated seller, according to the New York Fed’s Web site.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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