Thanksgiving surprise: $800 billion more for the credit markets

The $800 billion in new outlays announced today by the federal government to unlock the credit markets might have come as a shock if you remembered Treasury Secretary Henry M. Paulson’s remarks a week ago as suggesting that he had no such new programs in mind for the rest of the Bush administration.

But what Paulson really said last week was that he didn’t intend to spend the second half of the $700 billion authorized under the Troubled Asset Relief Program, or TARP. And that’s still the case, because the $800 billion — which is going to buy or finance purchases of asset-backed securities — is coming not from the Treasury but from the Federal Reserve.

The Treasury is spending $20 billion of TARP money to provide “credit protection” to the Fed for some of its lending. But that appears to be an inside-the-beltway tactic that allows Paulson’s agency to share some of the risk of the deal.

Not that the government wants you to think it’s taking on much risk with these new programs.

Under the first one, the Fed is buying up to $600 billion in debt issued or guaranteed by Fannie Mae, Freddie Mac and other government-backed housing agencies.

These securities aren’t the “toxic” mortgage debt that TARP was originally designed to buy (but now won’t because most of the first $350 billion is being used to buy stock in banks).

But investors currently see Fannie and Freddie debt as much riskier than Treasury securities, even though the government has practically said it wouldn't let Fannie and Freddie default. As a result, the securities are trading at unusually high yields relative to the yields on Treasuries. That means higher interest rates on mortgages -- exacerbating the housing downturn, the original cause of the credit crisis.

By buying Fannie and Freddie debt, the Fed believes the yields will go down, taking mortgage rates down with them. And if the market for that debt returns to normal, the Fed might even be able to sell the securities at a profit.

And that’s the simple initiative announced today.

The other one is called the Term Asset-Backed Securities Loan Facility. (The Fed calls it TALF. Doesn’t quite roll off the tongue the way TARP does.)

Under TALF, the Fed will lend up to $200 billion to investors who buy securities backed by consumer loans such as credit card debt (but not mortgages). The markets for such asset-backed securities ground to a halt last month because of a lack of buyers. If they remain closed, you may very well see the limit on your credit cards reduced or the cards canceled altogether. You may already have gotten a taste of this from issuers such as American Express and Citigroup. Although that might actually help you put your personal balance sheet in order, if enough people were forced to trim their debt by cutting back on spending, the economy would suffer.

The Fed says it will demand more in collateral (the asset-backed securities) than it will lend under the program. But if the value of the securities falls below the amount it lends, the Fed will be on the hook for the difference.

Still, the central bank implies it will take on minimal risk. But it’s for this program that the Treasury is putting up credit protection. That indicates the risk is significant; otherwise, why protect against it?

But if there are losses, what’s the difference whether it’s the Fed or the Treasury that loses the money? To you, the taxpayer, not much.

-- Arthur Buckler

Comments

[Zeromydebtnow.com]

When are we going to stop quoting govt figures and tell it like it really is.... When the govt says $800 million.. It really means $1.6 TRILLION.

[Joel Isaacson]

There is a better way to quickly reduce foreclosures and credit defaults, give lenders more money and increase housing values.

Here’s how it works.

The government takes the 800 billion dollars they plan to give to the financial institutes, and pay off as many bad mortgages as they can.

When they do this, here is what will happen:
1. As each loan is paid off, the bank or mortgage lender will have that money to loan to other borrowers.

2. The bank or mortgage lender will have one less BAD loan on its books. As more and more bad loans are paid off the bank will have fewer defaults and projected losses, and should be able to manage their business without government help. After all, if only 2 or 3 percent of a bank’s portfolio consists of bad loans, it should be easily able to handle that.

3. The homeowner now has no mortgage to pay. What do you think the homeowner will do? Well, the homeowner has been struggling with bills for months, if not years. He has put off fixing the house, buying a car, buying clothes, taking a vacation, etc. Now that there is no mortgage to pay, he will be out there doing these things. He will be putting money into the system to catch up.
HE WILL BE BUYING!!!

If the homeowner puts some of the money in the bank, that will just give the bank more money to lend.

4. For each loan paid off by the government, there will be one less home in foreclosure or looking to be sold. As the inventory of available homes goes down, the competition for the remaining homes goes up, and so will the price of homes.

Now, I know that a lot of people will say that this will give money to flakes and people who don’t deserve it. Also they will ask how to choose these people and that those who don’t get their mortgage paid off will be angry.

There needs to be some rules to the selection process.
First, the homeowner must be living in the home, and should not own more than one home. Multiple homes can be a sign of an investor. This money should only go to families that earn their living from hard work and not investing.

Second, the homeowner must be either in default, or have one of those bad loans where the interest rate has kept going up and is putting the homeowner in jeopardy. As fewer of these homeowners can be found, then the criteria can be expanded to include others.

Third, the major breadwinner in the home must have a job. Why is this important? Because the purpose of this process is to have the homeowner stay in the home and use the money they were paying for the mortgage to buy other things.

In conclusion, fix the problem from the bottom up. Don’t give money to banks so they can buy other banks and give big bonuses. Banks won’t spend money.