Fed Offers $800 Billion New Loans

123jump.com Staff
25 Nov, 2008
New York City

The Federal Reserve extended up to $800 billion of loan facilities to the mortgage and asset based backed loans market. The Fed is quickly running out of alternatives and is now deeply engaged in buying riskier loans and appears to take risk that most banks failed to manage.

[R]9:40AM New York – The Fed extends $800 billion of loan facilities to support mortgage and asset backed loans.[/R]

Federal Reserve after months of trying various alternatives to sustain the economic expansion took a giant step today and extended itself deeper in lending on riskier loans. The Federal Reserve which has dual mandate of price stability and economic expansion is now all out to assume more risk, expand lending and forsake the worries of inflation. The U.S. dollar may be casualty in the longer term.

The Fed in its latest actions today offered $200 billion to asset backed loans market, the market that has essentially halted in the last five weeks. The new program called Term Asset Backed Securities Loan Facility will buy loans that are collateralized by student loans, auto loans, credit card loans and loans to small businesses guaranteed by Small Business Administration.

The program will be administered by the Federal Reserve Bank of New York and will have credit protection of $20 billion from the U.S. Treasury under the TARP program. The loans will be backed by the collateral all the time and will be issued after lowering the amount of the collateral to reflect the current market prices and trends.

The Fed also launched another program to purchase $100 billion of loans directly from the three government agencies Fannie Mae, Freddie Mac and Ginnie Mae. The Fed will also purchase $500 billion of mortgage backed securities from the agencies and in a competitive auction over several quarters.

The latest Fed action puts a faith in its ability to determine the values of the collateral and market trends. It was the miscalculation of these risks that forced most of the banks and government agencies Fannie and Freddie to the brink of the bankruptcy and now the Fed is essentially engaged in the same activity with virtually no experience and limited staff.

Chairman Bernanke and Secretary Paulson in the past have repeatedly asserted that most government programs are safe and the Fed has “never lost a penny.” The Fed has now extended itself into commercial paper market, asset backed loans and into backing illiquid mortgage backed securities for which there is no market mechanism.

The Fed is heading in a direction where it may end up holding billions of dollars of securities for which there may not be any buyers in the longer terms.