Fed Throws $800 Billion More At Credit Markets

The Fed initiated yet another lending facility called the Term Asset-Backed Securities lending Facility (TALF.)  The TALF will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans.  The Treasury will provide $20 billion of credit protection to the Federal Reserve Bank of New York in connection with the TALF.  This new facility is aimed at freeing up lending in the consumer and small business loan arena, and should help companies like American Express who were begging for TARP funds because the ABS market had essentially shut down.  

Additionally, the Federal Reserve announced this morning that it would purchase as much as $600 billion in debt issued or backed by GSE's.  The $600 billion will be broken down into $100 billion in direct debt of Fannie, Freddie and the Federal Home Loan Banks and $500 billion in MBS.  The direct debt will be purchased through auctions from primary dealers, while the MBS will be purchased from asset managers to be selected via a competitive process (i.e. PIMCO)

These programs are aimed at alleviating the continued pressure in the credit markets that have forced spreads to widen to unprecedented levels.  Consequently, despite the Fed's easing to a 1% fed funds target, borrowing rates for consumers on mortgages and other types of debt remains stubbornly high.  Will this work?  Who knows?  Bringing down the cost of mortgages was the initial goal of putting Fannie and Freddie into conservatorship, and that didn't seem to go too well.  Furthermore, I'm not sure if it's just my twisted sense of humor, but I find it hilarious that the Fed is buying GSE debt.  The government already owns the GSEs.  So, the government is basically buying debt from...itself.  Why this should tighten spreads further is a mystery to me, but it will probably work in the short term.  Much like yesterday's announcement of the Citigroup bailout, a detailed outline of how losses would be allocated to each government entity had me in hysterics.  In the end, does it really matter if the FDIC or the FED takes the hit?  It's ultimately all going to come out of our pockets.