Govt action may revive ABS with liquidity, trust

By Nancy Leinfuss

NEW YORK, Nov 14 (Reuters) - As details of the U.S. Treasury's latest initiative to revive consumer lending emerge, hopes are growing that government help will revive the asset-backed securities market by boosting liquidity and bolstering confidence.

The market for securities backed by credit card, auto and student loans shut down at the beginning of the fourth quarter as the credit crisis, mounting job losses and a shrinking investor base dried up sales.

"The quickly deteriorating trend for the labor market makes a revival of consumer lending extremely difficult without government action," said Ben Garber, analyst at Moody's.

On Wednesday, Treasury Secretary Henry Paulson announced a shift in focus for the government's $700 billion Troubled Asset Relief Program, or TARP, away from buying troubled mortgage assets and toward further capital injections for banks.

Paulson also said support was needed for markets that securitize credit outside the banking system, which represent about 40 percent of lending. The Treasury is considering the creation of a liquidity facility for highly rated "AAA" asset-backed securities.

"When you look at people who borrow to buy a car, there's 'AAA'-rated auto loan paper, there's 'AAA'-rated credit card and there's 'AAA' student loan. That market has all but collapsed, and when that collapses it's hard for the American people to get the money they need to get the economy going," said Paulson during an interview with U.S. television anchor Jim Lehrer on Thursday.

"So that's another program we're working on. It isn't as systemically important, but it's very important to the economy," said Paulson.

Glenn Schultz, analyst at Wachovia Securities, said the best way to execute this latest initiative is for the government to buy consumer ABS in the new issue market, which has shut down with the freeze in credit markets and surge in financing costs.

"This would provide a benchmark for pricing in the primary and secondary markets. Private investors would have the opportunity to invest alongside the public fund," said Schultz.

Purchases in the primary market would add liquidity to lender balance sheets that could then be used for additional lending.

SHORING UP CONFIDENCE

Plans for a government fund or guarantee of consumer ABS will be crucial to moderating the credit squeeze that is fueling the current recession, said the Moody's economist.

ABS securities backed by credit cards slumped 47 percent to $11 billion in the third quarter, compared to the same quarter in 2007, while auto ABS plunged by 65 percent to $6 billion, according to Moody's.

"With a deep contraction in lending having already unfolded, the worsening consumer fundamentals discourage a sizable revival in the structured markets," said Garber.

But aside from pumping liquidity into the securitization market for nonmortgage assets, improving transparency and shoring up investor confidence is crucial.