Government to Spend $200 billion to Unclog Consumer Lending Market

In yet another bailout related move, the U.S. Treasury Department Tuesday said it would allocate $200 billion to back a lending facility for the consumer asset backed securities market established by the Federal Reserve Bank of New York. But financial experts are unsure that it will do much more than the Treasury’s earlier moves to try to ease up the flow of credit.

The asset backed securities (ABS) market provides liquidity to financial institutions that provide small business loans and consumer lending such as auto loans, student loans, and credit cards. While ABS issuances in these categories were roughly $240 billion in 2007, issuance of consumer ABS declined precipitously in the third quarter of 2008 before essentially coming to a halt in October, according to the Treasury Department. Treasury added that continued disruption in the ABS market could further deteriorate credit availability for consumers and increase the prospects for further deterioration in the economy generally.

The Term Asset Backed Securities Loan Facility (TALF) is intended to assist the credit markets in accommodating the credit needs of consumers and small businesses by helping the issuance of ABS and improving ABS market conditions.

Under the terms announced by the Treasury Department, the underlying credit exposures of eligible securities initially must be newly or recently originated auto loans, student loans, credit card loans or small business loans guaranteed by the U.S. Small Business Administration. The facility may be expanded over time and eligible asset classes may be expanded later to include other assets, such as commercial mortgage-backed securities, non-agency residential mortgage-backed securities or other asset classes.

Under the new facility, the Federal Reserve Bank of New York will lend up to $200 billion on a non-recourse basis to holders of newly issued AAA-rated ABS for a term of at least one year. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department will provide a $20 billion of credit protection to the Federal Reserve in connection with the facility, using its authorities in the Emergency Economic Stabilization Act of 2008.

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That the Treasury made yet another move after the Trouble Asset Relief Program (TARP), Federal Reserve interest rate cuts, and other rescue efforts “speaks volumes,” Dan North, chief economist at Euler Hermes, a trade credit insurance firm, told insideARM.

“There’s a crisis of confidence,” North added. “Once Obama is sworn in, things might settle down. It’s a good thing that he picked [Tim] Geitner as Treasury Secretary; the markets liked that. It was a good, solid pick.”

But while President Bush and Henry Paulson are still in charge, the credit markets are likely to remain in their current logjam, according to North, who accused Paulson of changing directions between stating his case for the TARP and its intended use of an approved $700 billion and actual receipt of the funding. Changing the plans for the funds indicates the plan was not well thought out.

The latest move continues that trend of announcing one plan of action then changing to another, North said. “It’s part of a scattershot approach. I don’t feel that it was well designed. I don’t think it will help that much.”

The ABS loan facility could provide some additional liquidity, said John Jay, senior analyst at Aite Group. “That the issuance had fallen to literally zero is very telling,” he noted

The student and consumer loan markets had been as fluid as mortgages before the credit market troubles of the last several months, Jay added.

“From the investor perspective, this should loosen up the markets a bit,” Jay said, pointing out that the one-year facility provides lenders with a backstop.

In addition to the $200 billion pledged to free up consumer lending, federal agencies also announced Tuesday that they would spent as much as $600 billion purchasing and guaranteeing the mortgages and mortgage backed securities of Fannie Mae and Freddie Mac, which the intent to free up mortgage lending to consumers.