$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.
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.
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.
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. 
