Feds Free Up Lending

By Markos N. Kaminis - Economy & Markets

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This morning's news was hot and heavy, but it highlighted two big new federal government actions. The government held a related press conference in the early AM hosted by Hank Paulson, discussing the Treasury's new consumer credit action and Federal Reserve's mortgage backed securities move. Finally, it appears the feds are following through on earlier plans, and we believe this will be effective in availing credit to new housing and consumer borrowers. That said, it does little in helping to place the citizenry into financial position to borrow, but President-Elect Obama might have something to say on that front in the afternoon. He's expected to discuss a fiscal stimulus plan, and may also present his Budget Director.

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Federal Government Actions

The Federal Reserve and Treasury Department offered a one-two-punch this morning, taking actions that greatly resemble what the TARP plan was supposed to do. The Federal Reserve will employ $100 billion to purchase direct obligations of housing-related government sponsored enterprises (GSE), freeing up those organizations to offer new liquidity to inspire the housing market. The Fed will then allocate $500 billion to purchase mortgage backed securities (MBS), freeing up financial institutions to operate and to offer liquidity to new borrowers. The MBS purchased will be managed by outside managers, selected through competitive processes. The Fed indicated that it is reacting to widened spreads for MBS, which is indicative of risk perception and frozen credit markets.

The Treasury will allocate $20 billion from the TARP program to put toward a lending facility backing the consumer asset backed securities market. ABS issuance came to a halt in October, and this capital is meant to encourage auto, small business, student and credit card lending. The capital is available for new such lending, and therefore may encourage its usage over hoarding or misuse. The Treasury's $20 billion is to be used as credit protection, to leverage a new $200 billion facility from the New York Fed. The NY Fed will lend this capital to encourage new ABS creation, and therefore, open up related capital to new borrowers.

Paulson seems concerned about potentially needing more funds from Congress, and how he might look in doing so. This appears evidenced by his keeping open the possibility of using these funds for just about any other asset class.

We speculate the Citigroup (NYSE: C) unraveling slapped the Fed and Treasury in the face, reminding them of the directive of the TARP program. Perhaps lulled to sleep, the near failure of Citi, and likely due diligence discovery in talking with the company worked to refocus Ben and Hank. The two have come under fire recently, and perhaps have been dodging more bullets than they've been firing of late. Whatever the catalyst, The Greek believes this will be effective in providing capital to new borrowers who demand it. However, it does little to help people demand it in the first place. Fiscal stimulus and keeping people employed will go toward that end.

Look for a news conference from Barack Obama this afternoon to perhaps offer some hope on that front. We view these actions as positive events for stocks, as they offer both catalyst and hope for economic recovery.


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