Fed Announces $800 Billion "Main Street" Bailout

Finally, Main Street gets a break! The Fed has just announced two new programs to bolster consumer credit markets.

The first is the TALF, a scheme to lend money to ABS (asset-backed securities) holders, so they can lend more money to consumers:

The Federal Reserve Board on Tuesday announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).

Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans.  The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS.  The U.S. Treasury Department–under the Troubled Assets Relief Program (TARP) of the Emergency Economic stabilisation Act of 2008–will provide $20 billion of credit protection to the FRBNY in connection with the TALF.  The attached terms and conditions document describes the basic terms and operational details of the facility.  The terms and conditions are subject to change based on discussions with market participants in the coming weeks.

New issuance of ABS declined precipitously in September and came to a halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS soared to levels well outside the range of historical experience, reflecting unusually high risk premiums.  The ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans.  Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity.  The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.

The other is a scheme to further relieve GSE obligations, and to step into the MBS market directly:

The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)–Fannie Mae, Freddie Mac, and the Federal Home Loan Banks–and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae.  Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late.  This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions and will begin next week.  Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end.  Purchases of both direct obligations and MBS are expected to take place over several quarters.  Further information regarding the operational details of this program will be provided after consultation with market participants.

So let’s see, this looks like another $800 billion (bigger than the TARP!) to be added to the bailout tally, bringing it to $8.2 trillion. Amazing how they can keep finding this cash in cushions.

The futures had been sagging this morning, but jumped up on the news and are now pointing to a higher open. Hank Paulson’s hesitation aside, the market does tend to react positively anytime the government makes some move to trade cash for assets.

See Also:
Paulson: Wait, I’ve Changed My Mind Again, I Want Rest Of TARP

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