Fed offers $200 billion to unlock credit markets

WASHINGTON — The government launched a much-awaited program Tuesday to spur lending for autos, education, credit cards and other consumer loans by providing up to $200 billion in financing to investors to buy up the debt.

If the program succeeds, it should help bust through the credit clogs in place since last year and make it easier for Americans to finance large and small purchases at lower rates, Federal Reserve Chairman Ben Bernanke told Congress. That, in turn, would help revive the economy, he said.

Created by the Fed and the Treasury Department, the program has the potential to generate up to $1 trillion of lending for businesses and households, the government said. It will be expanded to include commercial real estate, though that won't be part of the initial rollout.

"There's a looming crisis in commercial real estate whereby owners of shopping malls, hotels, rental properties and many other types of buildings are unable to refinance or to pay for new construction because the (commercial) securitization market is completely shut down," Bernanke said during an appearance before the Senate Budget Committee.

The program will start off by providing $200 billion in loans to investors with the goal of jump-starting lending to consumers and small businesses. The program, dubbed the Term Asset-Backed Securities Loan Facility, was announced last fall, but it took more than four months to implement because of the complexity of the problem.

The program is open only to new loans made under more stringent terms than the loans that contributed to the present credit crunch. The government is still drawing up its plan for dealing with existing "toxic" assets still on bank balance sheets.

Vincent Reinhart, a former director of the Fed's division of monetary affairs, said the program will directly aid ordinary consumers.

"For new lending to get made, banks have to know that they can sell those obligations. But the market for those asset-backed securities is frozen," Reinhart said. "The pipeline has been blocked. Now that the Fed will be opening the pipeline, new lending will be possible. So this will directly help households."

Participants — companies and investors that pledge eligible collateral to back the loan — must request the new government loans by March 17. The Fed will provide the three-year loans on March 25.

Under the program, the Fed will buy securities backed by different types of debt, including credit card, auto, student and small business loans. The credit crunch — the worst since the 1930s — has made it much harder for people to obtain such financing , and those who do can be socked with high rates.

Before the financial crisis, banks relied on packaging such loans into securities and selling them to pay for additional lending. That process had financed about 25 percent of consumer loans in recent years until the credit markets ground to a halt in October, the government said.

Anil Kashyap, a professor at the University of Chicago's Booth School of Business, said the program should make it easier for consumers to get loans. But he cautioned that the Fed's involvement in this area could have unintended consequences elsewhere by making other debt securities not backed by the government less attractive to investors.

The Fed plans to keep the program running through December, but said it could be extended.

In his testimony, Bernanke repeated his call for continued government action to bolster the financial system, which he described as crucial for a sustainable recovery to take hold.

"Historical experience strongly suggests that without a reasonable degree of financial stability, a sustainable recovery will not occur," he said.

Bernanke tacitly endorsed President Obama's call for huge increases in spending and trillion-dollar deficits over the next couple years, saying the economic crisis required aggressive action.

Information from the Los Angles Times and New York Times was used in this report.

Bailout defended

Irritated lawmakers grilled Federal Reserve Chairman Ben Bernanke on Tuesday over the latest bailout of American International Group, a $30 billion lifeline on Monday for to the ailing insurance giant. "I share your concern, I share your anger," Bernanke told the Senate Budget Committee. "It's a terrible situation, but we're not doing this to bail out AIG or their shareholders. We're doing this to protect our financial system and to avoid a much more severe crisis in our global economy."

Monday's action was the government's fourth effort to stabilize AIG since September. Both Democrats and Republicans expressed skepticism over whether the action would work.

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Fed offers $200 billion to unlock credit markets 03/03/09 [Last modified: Tuesday, March 3, 2009 11:21pm]

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