Take Two

Story Highlights:

• The Federal Reserve unveiled two new programs on Tuesday to help credit and financial markets.
• The Term Asset-Backed Securities Loan Facility (TALF) is aimed at increasing credit availability to consumers and small businesses by easing pressures in the asset-backed securities market.
• A second program will purchase the direct obligations of housing-related government-sponsored enterprises to help reduce the costs and increase the availability of mortgage financing.
• The Fed and Treasury have been implementing various liquidity programs using trial by fire, and changing course when they do not seem to fully resolve problems. Though this can create uncertainty and other unintended consequences, it can also help determine what does and doesn't work.

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If at first you don't succeed, try, try again. - Thomas H. Palmer (Teacher's Manual, 1840)

There's nothing like a redo to salvage an otherwise losing situation. The initial run of the Treasury's Troubled Asset Relief Program (TARP) appeared to hit a wall and the government decided to—changing TARP's original focus and introducing additional programs that expand into new credit territories to ease liquidity pressures.

Besides a requiring Fannie and Freddie to restructure loans, the Federal Reserve unveiled on Tuesday to help improve lending conditions and that expand the types of credit markets covered by the Fed. One, the Term Asset-Backed Securities Loan Facility (TALF) is aimed at increasing credit availability to consumers and small businesses. The second program will purchase the direct obligations of housing-related government-sponsored enterprises (GSEs) to help reduce the costs and increase the availability of mortgage financing.

Under TALF, the Fed will extend up to $200 billion in non-recourse loans to holders of eligible asset-backed securities (ABS) with underlying exposures to auto loans, credit card loans, student loans, or small business loans guaranteed by the US Small Business Administration (SBA). The ABS market has historically funded a substantial share of consumer credit and SBA-guaranteed small business loans, but since October, ABS issuance has been. The Fed is hoping TALF will ease pressures in this market to encourage new issuance and help support broader economic activity. TALF loans will be awarded on a monthly basis in a competitive, sealed bid auction process and have a one-year term, with interest paid monthly. The program is slated to start next February and will be backed by $20 billion in credit protection from the Treasury via TARP.

In the second program, the Fed will purchase up to $100 billion in GSE debt (or debt issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks) through a series of competitive auctions starting next week. The Fed will also purchase up to $500 billion in GSE-backed mortgage-backed securities (or debt backed by Fannie, Freddie, and Ginnie Mae) in a program scheduled to start by the end of this year. The Fed is hoping these two moves to assist GSEs will support housing and improve financial markets. More details about the plan, including whether the Fed will hold GSE debt until maturity or sell them, have yet to be revealed.

So far, the Fed and Treasury have been implementing various liquidity programs using trial by fire and changing course when they do not seem to fully resolve problems (see TARP). Though this can create uncertainty and other unintended, it can also help determine what does and doesn't work (for example, TALF recalls the Fed's successful) and develop more targeted solutions.

These new programs expand Fed involvement into new areas and appear to be steps in the right direction, although much remains to be determined. Still, it's clear from these moves that the Fed's willing to try, try again to succeed and will continue innovating until the job is done. Those the Fed's running "out of ammo" will soon realize this if they haven't already.

Happy Thanksgiving.