Fed $1,000bn financing plan nears launch
By Krishna Guha in Washington
Published: February 26 2009 00:46 | Last updated: February 26 2009 00:46
The US Federal Reserve will launch its financing programme, worth up to $1,000bn, for consumer and business loans in the coming days, amid concerns that hedge funds might find it difficult to take advantage of the scheme.
The programme – the
term asset-backed securities loan facility (
Talf) – is the cornerstone of the US authorities’ push to jump-start the credit market. Officials at the central bank say it will be up and running by the end of this month.
Fed and Treasury officials say this is an essential complement to efforts to repair the banking system. The idea is to boost the supply of new credit-card loans, student loans and car loans by providing low-cost finance to investors who buy these loans bundled up as securities in the secondary market.
But the Talf relies on private-sector investors being willing and able to take advantage of the financing the Fed makes available.
Consultations have revealed potential obstacles to participation. The most significant of these are limits on the ability of investors who use Talf finance to buy an asset to transfer the loan when they sell it.
An asset sold with low-cost three-year financing attached would command a higher price than an asset that had to be financed in distressed private markets at the point of sale.
Moreover, most hedge funds do not have permanent capital so they have to consider the risk that redemptions could force them to sell the assets before the three years are up.
Central bank officials have tried to meet this concern by allowing investors to transfer the funding to an eligible purchaser subject to the approval of the New York Fed.
Officials are optimistic that attractive rates will ensure sufficient participation to make the scheme a success.
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