$1 trillion to boost lending

Federal Reserve program will aim to jumpstart credit cards, auto and student loans. Program will also cover loans backed by commercial real estate.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Tami Luhby, CNNMoney.com senior writer

Tracking the bailout
Who's getting the bank bailout money
The government is engaged in an unprecedented - and expensive - effort to rescue the economy. Here are all the elements of the bailouts.
How effective do you think the Geithner plan to spur lending will be?
  • It's enough to do the job
  • It's a start, but more aid will be needed
  • It won't work

NEW YORK (CNNMoney.com) -- The Obama administration and the Federal Reserve unveiled a $1 trillion program on Tuesday aimed at revitalizing lending to consumers and businesses.

The program expands on a $200 billion effort unveiled in November to lend money to investors to purchase securities backed by debt such as credit cards and auto, student and small business loans. The effort, called the Term Asset-Backed Securities Loan Facility, was to have started this month.

Now named the Consumer & Business Lending Initiative, the program will also cover securities backed by commercial real estate mortgages, another troubled sector. It may grow further to include securities backed by corporate debt and by residential mortgages not guaranteed by Fannie Mae and Freddie Mac.

The Treasury Department will put $100 billion in capital to fund the program and protect the Fed against losses, up from $20 billion announced in November.

Analysts have mixed views on Tuesday's announcement. Some said investors were eagerly awaiting the initiative's start, while others said its level of success will only be known after it starts.

Funding crisis

With fear gripping the global markets, investors have shied away from buying such securities, which keep credit flowing by providing financial institutions with funding to make new loans. Between 2006 and 2008, lending funded by securitization dropped by $1.2 trillion.

As a result, financial companies have pulled back on making credit available to consumers. Some 40% of consumer lending depends on securitizations, since many of the companies that provide the credit are independent financial firms that have few other sources of funding.

"Because this vital source of lending has frozen up, no plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses - large and small," Treasury Secretary Tim Geithner said in a speech Tuesday laying out the administration's financial rescue plan.

The lack of an appetite for securitizations is one of the reasons the automakers are in such trouble - their financing arms can't make loans to interested car buyers. Meanwhile, credit card companies are pulling back on their spending limits and raising fees, while student loan firms are making it harder to qualify for financing.

Accessing credit is vital to reviving the economy. Without access to credit, businesses can't expand and consumers can't shop.

Under the plan, the Federal Reserve would loan funds to investors in exchange for collateral, which would be newly and recently issued AAA-rated securities backed by auto, student, small business, commercial real estate and credit card loans. The Fed would require the investor to pay it a portion of the purchase first, with the amount varying with the riskiness of the security.

Here's an example of how it would work: A bank issues $1,000 worth of securities backed by high-quality credit card loans. A hedge fund investor using the Fed lending program would give the Fed $50, and the Fed would provide a loan of $950 to purchase the security, which it would hold as collateral.

The bank gets $1,000 to make new loans, and the hedge fund gets a stream of interest income and could benefit if the security goes up in value.

The Treasury Department said taxpayers will be protected because collateral will be restricted to the highest-quality securities. The Fed can only lose money if the value of the security drops below the amount of the loan.

But the bailout's federal watchdog said recently the program is vulnerable to fraud and additional protection measures need to be implemented.

The main concern is that the Fed will accept securities that have been overvalued by investors. This is particularly worrisome, said Neil Barofsky, the bailout's special inspector general, because the loans are non-recourse, meaning the investor can surrender the collateral and walk away from the loan. The Fed can't demand the investor put up more money if the collateral falls in value.

Mixed reviews

Experts are divided about how effective the program will be in jump-starting lending.

Investors and issuers are eagerly awaiting the program's debut, said Howard Goldwasser, partner at Allen & Overy law firm. And once investors signal they are willing to buy the securities, issuers will once again make loans.

"It will bring investors back to the table," Goldwasser said.

The fact that the loans are non-recourse make them attractive to investors, said Dennis Moroney, research director in TowerGroup's bank cards practice. That way, they don't have to worry about whether the securities drop in value, enticing them back into the market

Also, expanding the program shows that federal officials realize how important securitization is, said Paul Jorissen, co-head of the financial practice at Mayer Brown law firm. The program's expansion means the government is willing to provide help beyond the banking sector.

But many of the federal bailout programs to date have not been able to unfreeze the credit markets and restore confidence in the financial system. That's why some experts say they won't pass judgment until this initiative begins.

"It certainly has the potential to work, but until it gets implemented we won't know for sure," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Sponsors

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.