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WORLD> America
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Fed launches new $200b consumer credit program
(Agencies)
Updated: 2009-03-04 08:52
If the program succeeds, it should help bust through the credit clogs in place since last year and make it easier for Americans to finance large and small purchases at lower rates, Federal Reserve Chairman Ben Bernanke told Congress. That, in turn, would help revive the economy, he said. Created by the Fed and the Treasury Department, the program has the potential to generate up to US$1 trillion of lending for businesses and households, the government said. It will be expanded to include commercial real estate, though that won't be part of the initial rollout. "There's a looming crisis in commercial real estate whereby owners of shopping malls, hotels, rental properties and many other types of buildings are unable to refinance or to pay for new construction because the (commercial) securitization market is completely shut down," Bernanke said during an appearance before the Senate Budget Committee. The program will start off by providing US$200 billion in loans to investors with the goal of jump-starting lending to consumers and small businesses. The program, dubbed the Term Asset-Backed Securities Loan Facility, was first announced late last year and originally was scheduled to start in February. Participants - companies and investors that pledge eligible collateral to back the loan - must request the new government loans by March 17. The Fed will provide the three-year loans on March 25. "We should see immediate benefits to students, to credit cards, to small businesses, to consumer loans," Bernanke told lawmakers.
Before the financial crisis, banks relied on packaging such loans into securities and selling them to pay for additional lending. That process had financed about 25 percent of consumer loans in recent years until the credit markets ground to a halt in October, the government said. Anil Kashyap, a professor at the University of Chicago's Booth School of Business, said the program should make it easier for consumers to get loans. But he cautioned that the Fed's involvement in this area could have unintended consequences elsewhere by making other debt securities not backed by the government less attractive to investors. "We'd really rather the credit markets just work properly," Kashyap said.
The Fed plans to keep the program running through December, but said it could be extended. The Fed and Treasury expect that securities backed by car-fleet leases as well as by certain equipment, including for heavy construction and for agriculture, will be eligible for Fed funding in its April operation. Participants in the second round of funding must request the government loans by April 7, which the Fed will disburse on April 14. The program, the Fed said, will remain focused on securities that are best able to aid the economy and financial markets and that can be added at a low risk to the government. Limits on executive compensation that apply to financial institutions receiving capital from the US$700 billion rescue program won't apply to lenders and other participants benefiting from the program. That's because it wants "to encourage market participants to stimulate credit formation" and use the program, the Fed said. |
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