March 3 (Bloomberg) -- The Federal Reserve said its $1 trillion program to prop up the market for auto and business loans will start disbursing funds March 25 and will probably accept securities backed by vehicle-fleet and equipment leases.
The Fed also lowered interest rates and so-called collateral haircuts for loans tied to asset-backed securities with guarantees by the Small Business Administration or to government- guaranteed student loans, the central bank and U.S. Treasury said in a statement in Washington.
Chairman Ben S. Bernanke and his colleagues, after cutting the benchmark interest rate almost to zero, are counting on the Term Asset-Backed Securities Loan Facility, or TALF, to help revive credit and end what may become the deepest U.S. recession since World War II. The government today signaled it will use the program to support an even broader array of credit markets.
“The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can most efficiently be added to the TALF at a low and manageable risk to the government,” the Fed and Treasury said.
The Fed and Treasury “currently anticipate that ABS backed by rental, commercial, and government vehicle fleet leases, and ABS backed by small-ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible for the April funding of the TALF,” which is scheduled for April 14, the agencies said.
The Fed originally planned to start the program in February. Central bank officials postponed the plan to ensure “all our legal and procedural steps had been taken,” Chairman Ben S. Bernanke said in congressional testimony Feb. 25.
The TALF will start by offering $200 billion in loans to hedge funds and other investors aimed at jumpstarting lending to consumers for autos, education and credit cards and to small businesses. The program also will help auto dealers finance the cars on their lots.
Protect the Fed
Treasury is providing $20 billion in capital from the Troubled Asset Relief Program to protect the Fed from losses. Treasury Secretary Timothy Geithner plans to increase the contribution to $100 billion, letting the Fed expand the program to $1 trillion and add other assets such as commercial mortgage- backed securities.
The central bank announced the TALF in November, and said in February the program could be expanded to commercial mortgage- backed securities and private-label residential mortgage-backed securities.
Treasury and Fed staffers are “analyzing the appropriate terms and conditions for accepting” CMBS, the agencies said today. Officials are considering accepting collateralized loan and debt obligations, ABS backed by non-auto dealer financing and ABS backed by mortgage-servicer advances, the statement said.
The Fed said on Dec. 19 it extended the term of TALF loans to three years from one year and will lend to all eligible borrowers rather than through an auction process.
The Fed’s Open Market Committee said in its Jan. 28 policy statement that it will “assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.”
The Treasury and Fed today reiterated a statement from last month that they will seek legislation to give the Fed “additional tools” to manage its balance sheet. Taking on longer-term assets makes it more difficult for the central bank to raise interest rates once the economy recovers.
The central bank has already doubled its balance-sheet assets to $1.92 trillion in the past year by creating other emergency credit programs.
To contact the reporter on this story:
Scott Lanman in Washington at slanman@bloomberg.net.
Last Updated: March 3, 2009 09:57 EST