Fed, Treasury offer US$800b more to credit markets

Channel News Asia
Fed, Treasury offer US$800b more to credit markets
Posted: 25 November 2008 2139 hrs

WASHINGTON: US authorities launched fresh efforts on Tuesday to unfreeze credit and limit the economic downturn with programmes to buy up to 800 billion dollars in mortgage- and asset-backed securities.

The initiatives call for up to 600 billion dollars in Federal Reserve purchases of mortgage securities, and a separate 200 billion dollars for asset-backed securities to help get credit to consumers.

"Throughout this financial market turmoil, our focus has been to stabilise the system and support the lending that is vital to our economy," Treasury Secretary Henry Paulson said.

The new efforts come as part of a move to restart consumer credit markets that froze up in October and to get more liquidity and bring down borrowing costs for the housing market, which is at the centre of the economic storm.

The effort "attempts to restart the credit markets after the nuclear explosion that occurred in September," said Andrew Busch, analyst at BMO Capital Markets.

"Clearly, the economy continues to reel from the extraction of low interest rates and available credit to financial institutions, to businesses, and to consumers."

Economist Marie-Pierre Ripert at Natixis added, "Both these measures are clearly a significant step in the action implemented by the Fed in trying to avoid a deeper recession and to prevent the economy to fall in a deflationary spiral."

The US central bank said it would launch purchases of up to 100 billion dollars of obligations of housing-related government-sponsored enterprises including Fannie Mae and Freddie Mac in the next week, and buy another 500 billion dollars in a process started by the end of this year.

Separately, the Fed said it would launch a programme to buy up to 200 billion dollars in asset-backed securities - backed by student loans, auto loans, credit card loans, and other loans - in a further effort to unclog frozen credit markets.

The US Treasury said it was allocating 20 billion dollars to the asset-backed securities fund as "credit protection."

"The asset-backed securities market provides liquidity to financial institutions that provide small business loans and consumer lending such as auto loans, student loans, and credit cards," Treasury said in a statement.

"Millions of Americans cannot find affordable financing for their basic credit needs," Treasury Secretary Henry Paulson said, adding that the programme "may be expanded over time" to other types of assets.

The statement noted that these assets-backed securities amounted to 240 billion dollars in 2007 but had dropped sharply in the third quarter of 2008 "before essentially coming to a halt in October," making it harder for consumers to get credit and threatening a seizing up of economic activity.

According to the Fed statement, "Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of US economic activity."

The Fed will lend up to 200 billion dollars to holders of AAA-rated asset-backed securities for a term of at least one year, with holders of the securities expected to accept "a haircut" reflecting the reduced market value.

The Fed said the action on mortgage securities "is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally."

The 500 billion dollars in mortgage securities will be purchased by asset managers selected via a competitive process "with a goal of beginning these purchases before year-end," the Fed said.

These purchases "are expected to take place over several quarters."

Ed Yardeni at Yardeni Research hailed the plan as big step to help the housing market and the economy.

"This is a major development," he said. "It should lower rates on such securities significantly. This should help to stimulate housing activity and economic growth."

The actions came as the government reported an economic contraction at a 0.5 percent pace in the third quarter, sharper than the estimate last month of a 0.3 percent decline.

Many analysts suggest this is just the start of a much more severe downturn with the housing market still under stress and credit frozen in many situations. AFP/ls/de