New lending program targets consumers, business

[Italkcash Newsfeed]

A new lending program from the Federal Reserve and the U.S. Treasury could generate up to $1 trillion in loans for small businesses and consumers, the government announced Tuesday.

The Term Asset-Backed Securities Loan Facility, or TALF, will provide its first loans March 25, the government said. The Fed announced the program involving asset-backed securities, also known as ABS, in November, then unveiled an expansion last month, but the highly anticipated program was delayed.

Companies or investors interested in participating will apply to the Fed on March 17.

The New York Fed will lend up to $200 billion to owners of high-rated asset-backed securities, such as those backed by consumer loans, auto loans, student loans, credit-card receivables or small-business loans. Investors or companies holding these loans will be able to use them as collateral to obtain fresh funding from the government to extend credit to new customers worth up to $1 trillion.

The Fed's program is designed to make a profit in the long run through interest and fees. To manage the growth in the Fed's balance sheet, the Fed and the Treasury will ask Congress for legislation to give the Fed additional powers.

The program will stimulate the economy by circumventing traditional credit channels that are now blocked up, the government said. With banks unable or unwilling to lend, even the most credit-worthy customers are finding credit hard to obtain.

"Issuance of consumer ABS has remained near zero since October," the Treasury said, adding that the stress in the market for extending credit to consumers "is one of the causes of the deepening recession."
"The program could represent a turning point for the economy and the financial markets by jump-starting lending in critical areas," said Tony Crescenzi, chief bond-market strategist for Miller Tabak & Co.

"If it works, a swath of economic data will be impacted, probably by the end of the second quarter or early in the third quarter, altering perceptions about the economy and boosting household, business and investor sentiment," Crescenzi said.

The Fed will conduct monthly TALF fundings through the end of the year if necessary.

A similar program to provide funding for the commercial-paper market has been judged a success, restoring credit flows to larger businesses. The TALF is designed to do the same for consumers and small businesses.
To limit the credit risk to U.S. taxpayers, the TALF will require some private capital to back each loan. In each case, the borrowers will have to put up extra collateral, known as a "haircut."

The program could be expanded to cover securities backed by auto or equipment leases, or to commercial mortgages, residential mortgages or collateralized debt obligations.