March 13 The Federal Reserve is launching its
latest offensive against the worsening recession next week,
targeting consumers and small businesses in what analysts call
its most ambitious emergency lending program to date.
This latest addition to the Fed's alphabet soup of programs
is known by its acronym TALF. For an analysis of the program,
WHAT IS THE TALF?
The Term Asset-Backed Securities Loan Facility targets
triple-A rated credit card, small business, student and auto
loans by trying to thaw the securities markets backed by those
assets. Before the crisis, ABS markets accounted for about 40
percent of all consumer lending.
But as the credit crisis heightened, markets seized up and
lending all but ceased. Fears that consumers and small
businesses could default on those loans drove the cost of
funding higher as investors demanded more compensation for the
risk of holding the securities.
WHY IS THE FED TARGETING CONSUMER LENDING?
Consumer spending makes up more than two thirds of the
United States' economic activity, and the Fed hopes that making
it easier to get credit will spur them to buy cars, for
example, which in turn would help the beleaguered auto sector.
Apart from backing securities for consumer and
small-business loans, the program also targets securitized
loans for heavy industrial equipment, agricultural-equipment
leases and rental-car fleets.
HOW DOES IT WORK?
Starting March 17, the Fed is offering loans to large
investors to buy newly issued ABS. On a specific day each
month, borrowers will be able to request one or more three-year
TALF loans. Having the Fed as the backstop removes some of the
risk for buyers who invest in these securities and may attract
new hedge fund investors.
WHAT CHALLENGES DOES THE TALF FACE?
There are some concerns among market participants that even
if the TALF makes credit more available, consumers may be
reluctant to take out new loans given the worsening economic
environment. Due to the financial crisis, banks may also be
cautious in their underwriting standards.
In addition, Standard & Poor's said on Friday that some
financial institutions have ample access to liquidity through
other government support programs at more favorable rates,
which could also curb demand.
Analysts said the focus on the highest rated tranches may
also limit the program's immediate impact.
WILL THE FED EXPAND THE TALF?
The Fed has said that while the initial program will total
$200 billion, it could be expanded to as much as $1 trillion.
New York Fed president William Dudley said last week that
the next version, which he called TALF 2.0, could include
commercial mortgage backed securities among other asset
classes. Dudley said in principle it could be expanded to
include older and lower-rated assets.
For the New York Fed's frequently asked questions on the
TALF, please see here
(Reporting by Kristina Cooke and Nancy Leinfuss, Editing
by Chizu Nomiyama)