Fed commits $800b to unfreeze lending

Washington: The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion (Dh2,938 billion).

The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion programme to support consumer and small-business loans, the Fed said in a statement on Tuesday in Washington.

With this announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S. Bernanke outlined as a Fed governor six years ago. Policymakers are aiming to prevent a fin-ancial collapse and stamp out the threat of deflation.

"They're trying to put funds into the system, trying to unfreeze these markets," said William Poole, the former St Louis Fed president, in an interview with Bloomberg Television. "Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk."

The Fed will purchase up to $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae, the statement said.

"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," the Fed said.

Separately, under the new Term Asset-Backed Securities Loan Facility, the Fed will lend up to $200 billion on a non-recourse basis to holders of AAA rated asset-backed securities backed by "newly and recently originated" loans, such as for education, automobiles, credit cards and loans guaranteed by the Small Business Administration, the Fed said.

Credit protection

The Treasury will provide $20 billion of "credit protection" to the Fed in the lending programme, using funds from the $700 billion financial-rescue package. The Treasury said in a statement that the facility may expand over time and cover other assets, such as commercial and private residential mortgage-backed debt.

On the ABS facility, the Fed is trying to avoid having "continued disruption of these markets" that would limit lending and "thereby contribute to further weakening of US economic activity," the central bank said.

Under the new lending programme, known as the Talf, the New York Fed will auction a fixed amount of loans each month for a one-year term.

Assets will be held in a special-purpose vehicle to be created by the Fed. The programme will stop making new loans on December 31, 2009, unless the Fed Board of Governors extends it.

Lenders providing credit under the Talf "must have agreed to comply with, or already be subject to, executive-compensation restrictions in the October bailout law," the statement said.

The Fed will start buying the direct debt of government- sponsored enterprises - Fannie, Freddie and a dozen federal home loan banks - through primary dealers in government debt from next week. The purchases of mortgage-backed securities will be done through asset managers, and officials aim to begin the effort by year-end.

Purchases of both types of debt "are expected to take place over several quarters," the Fed said.

Report: Battered economy

The US economy shrank more severely during the third quarter than first estimated as consumers cut spending at the steepest rate in 28 years, according to a Commerce Department report yesterday that underlined how rapidly activity was slowing.

Corporate profits fell for a second straight quarter and business investment fell, the department said as it revised the annual rate of decline in third-quarter gross domestic product to 0.5 per cent from 0.3 per cent that it reported a month ago. It was the sharpest fall in GDP since the third quarter of 2001 when the terror attacks against the United States took place.

Many analysts consider the United States has already joined Europe in recession.

The US decline is predicted to accelerate in the fourth quarter and last into 2009.

- Reuters