Fed launches program to boost consumer credit
Central bank offering $200 billion for car loans, credit cards, education

The Fed said the program has the potential to generate up to $1 trillion of lending for businesses and households starved for credit, which is the lifeblood of the economy.

"We should see immediate benefits" from the program, Fed Chairman Ben Bernanke told Congress Tuesday.

The bold program, dubbed the Term Asset-Backed Securities Loan Facility (TALF), was first announced late last year and originally scheduled to start in February.

Under the program, the Fed will buy securities backed by different types of debt including credit card, auto, student and small business loans. The credit crunch — the worst since the 1930s — has made it much more difficult for people to obtain such financing , and those who do can be socked with high rates.

The program aims to help lenders securitize their debt. Banks package loans into securities and sell them to investors. The proceeds help banks fund more loans. But trust leached out of the system because of the credit crunch sparked by the subprime mortgage crisis and by a faulty method for measuring risk across asset-backed securities. For months, investors have been wary of buying securities backed by consumer loans. The TALF is supposed to fix the broken securitization market by reducing the risk to investors.

Participants — companies and investors that pledge eligible collateral to back the loan — must request the new government loans by March 17. The Fed will provide a first round of three-year loans on March 25.

"The TALF is designed to catalyze the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities," the Fed and Treasury Department said in a joint statement. "The TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy."

The Fed plans to keep the program running through December but said it could be extended.

Treasury Secretary Timothy Geithner announced an expansion of the Fed's program on Feb. 10, saying it also will include support for commercial mortgage-backed securities. The central bank said teams from Treasury and the Fed are analyzing the right terms for the commercial real-estate component.

The Fed and Treasury currently anticipate that securities backed by car fleet leases as well as certain equipment — including for heavy construction and for agriculture — will be eligible for Fed funding in its April operation.

Participants in the second round of funding must request the government loans by April 7, which the Fed will disburse on April 14.

The program, the Fed said, will remain focused on securities that will have the greatest impact to aid the troubled economy and shaky financial markets and that can be added at a low risk to the government.

Prior to the financial crisis, banks relied heavily on packaging loans into securities and selling them to fund additional lending. That process has financed about 25 percent of all auto, student and other consumer loans in recent years, the Treasury Department said Tuesday, until the credit markets ground to a halt in October.

Anil Kashyap, a professor at the University of Chicago's Booth School of Business, said the program should make it easier for consumers to get loans. But he cautioned that the Fed's willingness to finance some debt could distort the markets by making other debt securities that lack the government's backing less attractive to investors.

"We'd really rather the credit markets just work properly," Kashyap said.

http://www.msnbc.msn.com/id/29484896/