WASHINGTON — Hoping to vault over the frozen credit markets and directly reach consumers and businesses, the Federal Reserve and Treasury Department on Tuesday unveiled a $200 billion plan they hope will spur up to $1 trillion in new lending.
If the program works, it could allow consumers and businesses with good credit histories to borrow more freely, even amid the recession.
Treasury and the Fed will provide $200 billion in financing to encourage investors to purchase top-rated loans whose underlying collateral is pools of car loans, student loans, credit card debt and loans to small businesses.
The Term Asset-Backed Lending Facility isn't a magic bullet. It will apply only to the safest of loans and the healthiest of financial institutions, so it can't fix all of what ails the credit markets and the broader economy.
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The Fed seeks, however, to show investors that it's safe to get back into the water.
Right now, banks aren't willing to lend and are parking their reserves at the Fed, said Alex Pollock, a former president of the Federal Home Loan Bank of Chicago and now a senior fellow at the American Enterprise Institute, a conservative research group in Washington. It's the equivalent of stuffing money under the mattress. Instead, the Fed is lending it out to people it thinks it can trust.
For much of the past 15 years, a wide range of loans had been bundled together and sold to investors through a process called securitization. It freed banks to lend more because these loans, or asset-backed securities, were transferred off their books into a secondary market outside the banking system.
Securitization allowed consumer finance to expand. In recent years, about a quarter of all lending to consumers — including home mortgages, credit cards, car loans and student loans — was securitized.
This market, however, is all but dead, weighed down by home mortgages amid plummeting property values and rising foreclosures. Investors have come to doubt even the stability of securities backed by car loans and student loans, and they fear defaults will rise as the recession deepens.
"These markets have ... been virtually shuttered since the worsening of the financial crisis in October," the joint Treasury-Fed statement said. "By reopening these markets, the (plan) will assist lenders in meeting the borrowing needs of consumers and small businesses."