The US Federal Reserve has announced plans to inject up to 800 billion dollars into the financial system by buying up mortgage and asset-backed securities in a bid to kickstart consumer credit markets.
The US Federal Reserve announced plans Tuesday to pump up to 800 billion dollars into the financial system in purchases of mortgage and asset-backed securities.
The new efforts come as part of a move to restart consumer credit markets that froze up in October and to get more liquidity and bring down borrowing costs for the housing market, which is at the center of the economic storm.
The US central bank said it would launch purchases of up to 100 billion dollars of obligations of housing-related government-sponsored enterprises including Fannie Mae and Freddie Mac in the next week, and buy another 500 billion dollars in a process started by the end of this year.
Separately, the Fed said it would launch a program to buy up to 200 billion dollars in asset-backed securities -- backed by student loans, auto loans, credit card loans, and other loans -- in a further effort to unclog frozen credit markets.
The US Treasury said it was allocating 20 billion dollars to the asset-backed securities fund as "credit protection."
"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," Treasury said in a statement.
The statement noted that these securities amounted to 240 billion dollars in 2007 but had dropped sharply in the third quarter of 2008 "before essentially coming to a halt in October," making it harder for consumers to get credit and threatening a seizing up of economic activity.
According to the Fed statement, "Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of US economic activity."
The Fed will lend up to 200 billion dollars to holders of AAA-rated asset-backed securities for a term of at least one year, with holders of the securities expected to accept "a haircut" reflecting the reduced market value.
The Fed said the action on mortgage securities "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 500 billion dollars mortgage securities will be purchased by asset managers selected via a competitive process "with a goal of beginning these purchases before year-end," the Fed said.
These purchases "are expected to take place over several quarters."
Date created : 2008-11-26