In light of continuing strains in financial markets, the Federal Reserve on Tuesday announced the extension through April 30, 2009, of three liquidity facilities: the Primary Dealer Credit Facility (PDCF), the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF), and the Term Securities Lending Facility (TSLF). These facilities had previously been authorized through January 30, 2009.
The extension through April 30 for these facilities is consistent with the term authorized for several other liquidity-related facilities: the Commercial Paper Funding Facility (CPFF), the Money Market Investor Funding Facility (MMIFF), and the temporary reciprocal currency arrangements (swap lines) with 14 other central banks.
The PDCF provides discount window loans to primary dealers. The AMLF provides loans to depository institutions to purchase asset-backed commercial paper from money market mutual funds. Under the TSLF, the Federal Reserve Bank of New York auctions term loans of Treasury securities to primary dealers. The CPFF provides a liquidity backstop to U.S. issuers of commercial paper. The MMIFF supports a private-sector initiative to provide liquidity to U.S.
Wednesday, December 3, 2008
Saturday, November 29, 2008
Finally Something for the Regular People
The U.S. Treasury Department today announced it will allocate $20 billion to back a lending facility for the consumer asset backed securities market established by the Federal Reserve Bank of New York.
The asset backed securities 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 issuance's 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. Continued disruption in the ABS market could further deteriorate credit availability for consumers and increase the prospects for further deterioration in the economy generally.
This facility, the Term Asset Backed Securities Loan Facility, is intended to assist the credit markets in accommodating the credit needs of consumers and small businesses by facilitating the issuance of ABS and improving ABS market conditions. 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. The attached term sheet describes the basic terms and operational details of the facility.
The asset backed securities 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 issuance's 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. Continued disruption in the ABS market could further deteriorate credit availability for consumers and increase the prospects for further deterioration in the economy generally.
This facility, the Term Asset Backed Securities Loan Facility, is intended to assist the credit markets in accommodating the credit needs of consumers and small businesses by facilitating the issuance of ABS and improving ABS market conditions. 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. The attached term sheet describes the basic terms and operational details of the facility.
Tuesday, November 25, 2008
Here We Go Again
The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital.
As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program.
With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.
We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:
As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program.
With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.
We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:
* We will work to support a healthy resumption of credit flows to households and businesses.
* We will exercise prudent stewardship of taxpayer resources.
* We will carefully circumscribe the involvement of government in the financial sector.
* We will bolster the efforts of financial institutions to attract private capital.
Can We Spend Our Way Out?
The politicians are banking on turning the economy around though use of a stimulus package. The theory behind economic stimulus programs is that if you put money in the consumers pocket they will spend it. What would you do if the government sent you back $1,000 of the previous money you paid in then added $1,000 to the national debt?
President Bush enacted a stimulus package in his first term. 1 out of 5 people spent the stimulus while 4 people either paid down debt or saved the money. If people are loosing faith in the economy don’t you think most would save as much as they can? Consider that over 60% of Americans plan on spending less this Christmas. What makes the government think that if they send us money that we’re going to run out and spend it?
What Else Is In Your Hat of Tricks? When I listen to the politicians speak about turning the economy around the solutions suggested are nothing new that hasn’t already been tried in the past. Our politicians have tried stimulus packages, tax cuts, tax increases, deficit spending and the list of tricks goes on and on. However, the dynamics of today’s economic crisis are not common ills that require common prescriptions to cure the virus that has spread globally. While the politicians point to remedies that were used during the great depression and suggest their actions will help avoid an economic meltdown globally they have no historical reference point or model to suggest their theories are correct. A lot of old talk spun against new problems which are systemically connected to everything and everyone globally. We’ve never had this condition before.
Throw Money At the Problem? The current deficit estimates of cost for all the currently planned bailouts, stimulus packages as well as the rising cost of supporting basic government, federal and state, operating plans etc exceed $7 Trillion. Did you hear me? $7 Trillion!
Throwing money at problems as complex as the current global economy and expecting us to stimulate the economy by spending more is not sound fiscal policy or clear thinking. Maybe I am not smart enough to understand economic policy however I am smart enough to add and to use common sense. Consider:
*Everyone is coming to the government for a bailout and you’re having trouble saying no
*You tell the auto industry you want a plan yet you haven’t showed your own plan to the American people
*You are using words like “hope, possibilities, creativity, resolve etc. etc.” while we the people use words like “foolishness, stupidity, selfish politicians, economic depression and despair.
*We see main street businesses going out of business. You see Fortune 500 Executives flying in for a handout in a private jet.
*We see friends wondering how and where to get a job so they can support their family. You see special interest groups wishing to protect their positions and their institutions.
The money our officials are throwing at the problems is debt. OK, so the message for the American public is just increase your debt and everything will be OK. Business owner’s, just borrow more money and everything will be OK. Don’t worry we the government will just print more money so there will be plenty to borrow. So you ask how will we pay it back? The government’s response: By spending more! And you wonder why we the people have no faith in your decisions. Maybe we should call it The Spend Economy.
President Bush enacted a stimulus package in his first term. 1 out of 5 people spent the stimulus while 4 people either paid down debt or saved the money. If people are loosing faith in the economy don’t you think most would save as much as they can? Consider that over 60% of Americans plan on spending less this Christmas. What makes the government think that if they send us money that we’re going to run out and spend it?
What Else Is In Your Hat of Tricks? When I listen to the politicians speak about turning the economy around the solutions suggested are nothing new that hasn’t already been tried in the past. Our politicians have tried stimulus packages, tax cuts, tax increases, deficit spending and the list of tricks goes on and on. However, the dynamics of today’s economic crisis are not common ills that require common prescriptions to cure the virus that has spread globally. While the politicians point to remedies that were used during the great depression and suggest their actions will help avoid an economic meltdown globally they have no historical reference point or model to suggest their theories are correct. A lot of old talk spun against new problems which are systemically connected to everything and everyone globally. We’ve never had this condition before.
Throw Money At the Problem? The current deficit estimates of cost for all the currently planned bailouts, stimulus packages as well as the rising cost of supporting basic government, federal and state, operating plans etc exceed $7 Trillion. Did you hear me? $7 Trillion!
Throwing money at problems as complex as the current global economy and expecting us to stimulate the economy by spending more is not sound fiscal policy or clear thinking. Maybe I am not smart enough to understand economic policy however I am smart enough to add and to use common sense. Consider:
*Everyone is coming to the government for a bailout and you’re having trouble saying no
*You tell the auto industry you want a plan yet you haven’t showed your own plan to the American people
*You are using words like “hope, possibilities, creativity, resolve etc. etc.” while we the people use words like “foolishness, stupidity, selfish politicians, economic depression and despair.
*We see main street businesses going out of business. You see Fortune 500 Executives flying in for a handout in a private jet.
*We see friends wondering how and where to get a job so they can support their family. You see special interest groups wishing to protect their positions and their institutions.
The money our officials are throwing at the problems is debt. OK, so the message for the American public is just increase your debt and everything will be OK. Business owner’s, just borrow more money and everything will be OK. Don’t worry we the government will just print more money so there will be plenty to borrow. So you ask how will we pay it back? The government’s response: By spending more! And you wonder why we the people have no faith in your decisions. Maybe we should call it The Spend Economy.
Saturday, November 22, 2008
Yet Another Bailout
The U.S. Treasury Department announced today that it agreed to assist with the liquidation of The Reserve Fund's U.S. Government Fund, due to unique and extraordinary circumstances.
The fund, which Treasury accepted into its temporary guarantee program for money market funds, has made a claim to Treasury under the program. In a separate agreement with the fund, the Treasury has agreed to serve as a buyer of last resort for the fund's securities, which consist of short-term U.S. government and government sponsored enterprise securities.
This action is being taken to ensure that the fund is liquidated in an orderly and timely fashion.
The agreement grants the fund a 45-day period where it will continue to sell assets. At the conclusion of this period, Treasury's Exchange Stabilization Fund will purchase any remaining securities at amortized cost, up to an amount required to ensure that each shareholder receives $1 for every share they own.
This extraordinary action is in response to the unique situation of the money market fund. This fund was permitted to suspend share redemptions as of September 17, in accordance with an order issued by the Securities and Exchange Commission.
The fund, which Treasury accepted into its temporary guarantee program for money market funds, has made a claim to Treasury under the program. In a separate agreement with the fund, the Treasury has agreed to serve as a buyer of last resort for the fund's securities, which consist of short-term U.S. government and government sponsored enterprise securities.
This action is being taken to ensure that the fund is liquidated in an orderly and timely fashion.
The agreement grants the fund a 45-day period where it will continue to sell assets. At the conclusion of this period, Treasury's Exchange Stabilization Fund will purchase any remaining securities at amortized cost, up to an amount required to ensure that each shareholder receives $1 for every share they own.
This extraordinary action is in response to the unique situation of the money market fund. This fund was permitted to suspend share redemptions as of September 17, in accordance with an order issued by the Securities and Exchange Commission.
Paulson Does What He Wants
We recognized that a troubled asset purchase program, to be effective, would require a massive commitment of TARP funds. It became clear that, while in mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. Half of that sum, in a worse economy, simply isn't enough firepower.
If we have learned anything throughout this year we have learned that this financial crisis is unpredictable and difficult to counteract. So early last week, we concluded it was only prudent to reserve our TARP capacity, maintaining not only our flexibility, but that of the next Administration.
We have identified other priorities that I believe the government will need to address through the TARP and other existing authorities. In particular, by investing only a relatively modest share of TARP funds in a Federal Reserve liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit.
And we need to continue our efforts to use a variety of authorities to reduce avoidable foreclosures. The government has made substantial progress on that front, through HUD programs, through the FDIC's program with IndyMac, through our support and leadership of the HOPE NOW Alliance, and through the new GSE servicer guidelines announced last week that will set a new standard for the entire industry. While I understand the interest in spending TARP resources on other approaches, the efforts already underway will do more to prevent foreclosures than might have been achieved through very large purchases of mortgage-related securities through the TARP.
If we have learned anything throughout this year we have learned that this financial crisis is unpredictable and difficult to counteract. So early last week, we concluded it was only prudent to reserve our TARP capacity, maintaining not only our flexibility, but that of the next Administration.
We have identified other priorities that I believe the government will need to address through the TARP and other existing authorities. In particular, by investing only a relatively modest share of TARP funds in a Federal Reserve liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit.
And we need to continue our efforts to use a variety of authorities to reduce avoidable foreclosures. The government has made substantial progress on that front, through HUD programs, through the FDIC's program with IndyMac, through our support and leadership of the HOPE NOW Alliance, and through the new GSE servicer guidelines announced last week that will set a new standard for the entire industry. While I understand the interest in spending TARP resources on other approaches, the efforts already underway will do more to prevent foreclosures than might have been achieved through very large purchases of mortgage-related securities through the TARP.
Sunday, November 16, 2008
Central Bankers Ready for More Actions
Federal Reserve Chairman Ben S. Bernanke said central bankers worldwide are prepared to take additional actions as needed to unfreeze credit markets, citing continued strains even amid ”tentative improvements.''
“The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain,'' Bernanke said today at a panel discussion hosted by the European Central Bank in Frankfurt. ``For this reason, policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant.''
Bernanke led the ECB and other central banks last month in the broadest coordinated interest-rate cut in history. The Fed also removed limits on currency-exchange programs with four of its counterparts, including the ECB, and agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore.
“Monetary policy actions have not resolved the ongoing strains in financial markets,'' Bernanke said in prepared remarks at the ECB conference, which is marking the 10th anniversary of the euro. Bernanke said “financial markets remain under severe strain,'' while noting “tentative improvements in credit-market functioning.''
He didn't specify what new steps central banks could take. The Fed, ECB, Bank of England and other central banks have all lowered rates since the coordinated cut on Oct. 8. While the governments probably won't coordinate fiscal policy, their actions will likely become increasingly similar, Bernanke said.
Central banks created the currency swap lines in response to ``strong demand for dollar funding'' in the U.S. and other countries, Bernanke said. The ``recent sharp deterioration'' in interbank and other funding markets, where some financial institutions normally got dollars, left some companies ``without adequate access to short-term dollar financing,'' he said.
Since the coordinated rate reduction, the Fed has cut its benchmark rate another half-point to 1 percent. The central bank has provided more than $1 trillion in loans to financial institutions to mitigate the worst credit crunch in seven decades and head off a global recession. The Federal Open Market Committee next meets Dec. 16. “Bernanke's remarks make us think another coordinated rate cut cannot be ruled out,'' there is “no hint that the Fed has run out of bullets,'' he said.
“Central bankers and other policy makers around the world must continue to work together to address disruptions in credit markets and to promote a vibrant global economy,'' Bernanke said.
“The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain,'' Bernanke said today at a panel discussion hosted by the European Central Bank in Frankfurt. ``For this reason, policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant.''
Bernanke led the ECB and other central banks last month in the broadest coordinated interest-rate cut in history. The Fed also removed limits on currency-exchange programs with four of its counterparts, including the ECB, and agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore.
“Monetary policy actions have not resolved the ongoing strains in financial markets,'' Bernanke said in prepared remarks at the ECB conference, which is marking the 10th anniversary of the euro. Bernanke said “financial markets remain under severe strain,'' while noting “tentative improvements in credit-market functioning.''
He didn't specify what new steps central banks could take. The Fed, ECB, Bank of England and other central banks have all lowered rates since the coordinated cut on Oct. 8. While the governments probably won't coordinate fiscal policy, their actions will likely become increasingly similar, Bernanke said.
Central banks created the currency swap lines in response to ``strong demand for dollar funding'' in the U.S. and other countries, Bernanke said. The ``recent sharp deterioration'' in interbank and other funding markets, where some financial institutions normally got dollars, left some companies ``without adequate access to short-term dollar financing,'' he said.
Since the coordinated rate reduction, the Fed has cut its benchmark rate another half-point to 1 percent. The central bank has provided more than $1 trillion in loans to financial institutions to mitigate the worst credit crunch in seven decades and head off a global recession. The Federal Open Market Committee next meets Dec. 16. “Bernanke's remarks make us think another coordinated rate cut cannot be ruled out,'' there is “no hint that the Fed has run out of bullets,'' he said.
“Central bankers and other policy makers around the world must continue to work together to address disruptions in credit markets and to promote a vibrant global economy,'' Bernanke said.
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