Fed’s new bailout program
Thus far, we have examined the efforts of The Treasury to coordinate a bailout of portions of our financial markets and potentially other sectors. Now, the Fed has stepped in with their own bailout.
$800 billion.
The original Treasury plan was to inject liquidity into the credit markets. Unfortunately, the U.S. is a credit based economy, and everything from student loans to car loans to credit cards relies on credit. Most loans are re-packaged as securities for sale to investors.
The Fed has created an asset-backed securities loan facility. The Fed came to the realization that institutional buyers and sellers had not re-entered the market for key mortgage and lending products.
So let’s review what programs have been instituted up to this point as part of the government bailout. (technically, the Emergency Economic Stabilization Act)
- The Treasury Department’s Capital Purchase Program - $250 billion for banks, $161 billion spent (Treasury gets preferred stock and/or warrants in return)
- The Treasury Department’s Troubled Asset Relief Program - $700 billion original program
- Systemically Significant Failing Institutions Program – provided the funding to AIG
- Unnamed program - funded the Citibank bailout- guarantee up to $306 billion in troubled assets. Purchase of $20 billion in Citibank preferred stock.
A continuing problem
From an article in MarketWatch;
The markets for asset-backed securities “historically have funded a substantial share of consumer credit and SBA-guaranteed small-business loans,” the Fed said in a statement detailing the new loan facility.
The facility is designed to generate increased credit availability and to support economic activity by facilitating renewed issuance of consumer and small-business asset-backed securities at what the Fed called “more normal interest-rate spreads.”
As a side note, the Treasury Department gave an additional $2.9 billion to 23 regional banks this week. And, in a surprising development, there is renewed speculation that an auto industry bailout is imminent. So far, the bailout has totaled more than four and a half trillion dollars. The government’s balance sheet is in serious disarray.
