Treasury Will Back up to $1 Trillion in Toxic Assets

Up to $1.0 trillion in insurance financing for the purchase of toxic assets was announced by the U.S. Treasury on Tuesday. For its part, the Federal Reserve announced the expansion of the Fed lending facility, the TALF - to include up to another $1.0 trillion in consumer debt, such as mortgage-backed securities.

The U.S. Treasury's program will enter into a private and public sector partnership where both sides will provide insurance financing on toxic debt.

The solution is hoped to jump-start trading in frozen markets and spur price discovery on the debt.

However, the final details of the toxic debt program remain unclear, according to Treasury Secretary Tim Geithner.

"We are exploring a range of different structures for this program, and we will seek input from market participants and the public as we design it," Geithner said. "We believe this program should ultimately provide up to $1 trillion in financing capacity, but we plan to start it on a scale of $500 billion, and expand it based on what works."

Geithner said the strategy is likely to take time to impact the markets.

In a separate but coordinated move, the Fed announced the expansion of the famous Term Asset-Backed Securities Loan Facility (TALF) to provide up to $1.0 trillion in support for consumer loans such as credit cards, mortgage-backed securities, auto loans, and student loans.

Previously, the Fed's program did not extend to mortgage-backed securities.

Given that the Fed theoretically has an unlimited balance sheet, this part of the program should not cost the tax payer.

Other details of the Treasury plan include significant transparency and limitation requirements for institutions participating in the so-called Financial Stability Program.

The plan will put a limit on dividends, stock repurchases and acquisitions on firms participating in the program.

Firms with over $100 billion in assets will have to go through a so-called "stress text" to ensure they have the "capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected."

Furthermore, banks will have to show how "every dollar" is spent, the Treasury said.

In the application process, they will have to present a plan of how they intend to use the money to boost lending. These reports will be made public on the website FinancialStability.gov.

The Treasury also announced measures to stem home foreclosures, and help small businesses on the verge of bankruptcy.

It will put as much as 600 billion towards government-sponsored enterprise (GSE) mortgage-backed securities. Fifty billion will be put toward stemming avoidable foreclosures.

Finally, the Treasury will attempt to boost lending to small businesses, which are having a hard time getting loans in the current environment. It will do so by buying AAA-rated loans to unfreeze secondary markets, and will attempt to increase the guarantee for small business loans to 90% from 75%. The Treasury also wants to reduce the fees for and time it takes to apply for a small business loan.

By Stephen Huebl
©CEP News Ltd. 2009

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