Meltdown 101: The Fed's $1T consumer loan plan

[March 21, 2009]  WASHINGTON (AP) -- This week, a $1 trillion government program to try to bust through credit clogs and get money flowing freely to shoppers, students, car buyers and mom-and-pop businesses kicked off.

If the program succeeds, loans to consumers and small businesses will become more plentiful - and cheaper. That, in turn, could increase Americans' appetite to spend and help lift the country out of recession.

The program, created by the Federal Reserve and the Treasury Department, is called the Term Asset-Backed Securities Loan Facility.

Here are some questions and answers about the TALF:

Q: How can we get loans directly from the Fed to buy a car or small business?

A: You can't. The program provides loans to big investors and companies to buy newly issued securities backed by consumer debt. The idea is to stimulate lending for auto, education, credit card and other loans for consumers and small businesses.

Q: How does it work?

A: The program will start by providing up to $200 billion in financing to investors, such as hedge funds, private equity funds and mutual funds, to buy up the debt. It has the potential to generate up to $1 trillion in lending for households and businesses.

Participating companies must have an account set up with a "primary dealer" - one of the 19 big banks and securities dealers that trade in U.S. government securities with the Federal Reserve Bank of New York. These dealers include Barclays Capital Inc., Banc of America Securities and Citigroup Global Markets Inc.

Q: When will average consumers benefit from this program?

A: Fed Chairman Ben Bernanke hopes soon. "We should see immediate benefits to students, to credit cards, to small businesses, to consumer loans," he told lawmakers this month.

Q: I've been hearing about this program for a while and thought "ALF" was coming back on TV. Wasn't it supposed to start earlier?

A: Yes. The program was announced late last year and slated to start in February. It's been hobbled by rule changes, worries from investors over financial privacy and fears among would-be participants about being the first to use the facility.

"I don't think there's a big appetite for investors to get involved," said Richard Yamarone, economist at Argus Research.

Investors requested a modest $4.7 billion worth of loans in the first batch of requests that were due Thursday. Of the total, $2.8 billion was to buy securities backed by credit cards and $1.9 billion was for securities linked to auto loans. No loans were requested for securities collateralized by student loans or loans guaranteed by the Small Business Administration.

Still, William Dudley, president of the Federal Reserve Bank of New York, called this a "a good start for a program that we will continue to build on in the future."

Q: Why is the government launching the TALF program?

A: For years, the markets for so-called asset-backed securities have been a key component of lending in the U.S. financial system. But the Fed says these markets "have been virtually shuttered since the worsening of the financial crisis in October." Lending to consumers and businesses has suffered as a result.

Q: Do the securities that investors buy have to be a certain quality?

A: Yes. The securities are highly-rated AAA. The program could turn out to be a boon for credit-ratings agencies - Standard & Poor's, Moody's Investors Service and Fitch Ratings - which have been criticized for contributing to the current financial crisis by not accurately assessing risk on various mortgage-backed securities. Those investments turned sour when the housing market collapsed.

Q: When will the first batch of loans go out?

A: Investors and companies had to make their loan requests to the Fed by Thursday. The requests lay out how much of a security, or securities, an investor wants to buy. It also documents the collateral being put up to back the loans.

For example, if an investor wanted a $1 billion loan, it would have to offer $100 million in collateral to back it. The investors must also pay an administrative fee.

The Fed is reviewing the initial requests to confirm eligibility, check out collateral and match the amount of securities an investor wants with what's available. The central bank will provide the three-year loans on March 25.

Q: How often will loans be made available?

A: Monthly through December when the program is set to expire, though the Fed could extend it.

In April, securities backed by auto-fleet leases, auto-dealer loans, business equipment and loans extended by mortgage servicers to cover payments missed by homeowners will be among the new categories added to the mix. Participants in this second round must file their loan requests by April 7. The Fed will provide the loans on April 14.

Q: Are the loan amounts limited?

A: A borrower must request at least $10 million for each loan, but there's no maximum. A borrower can request one or more loans each month.

Q: Will commercial real estate be covered by the program?

A: Yes, though it won't be part of the initial $200 billion rollout.

"There's a looming crisis in commercial real estate whereby owners of shopping malls, hotels, rental properties and many other types of buildings are unable to refinance or to pay for new construction," Bernanke warned lawmakers this month.

Q: How does TALF fit into other efforts?

A: It's part of a string of radical programs rolled out by the Fed to battle the worst financial crises since the 1930s. The central bank on Wednesday said it will pump $1.2 trillion into the economy to lower interest rates and try to spur consumer spending. The Fed will start buying government bonds and boost its purchases of mortgage-backed securities from Fannie Mae and Freddie Mac.

[Associated Press; By JEANNINE AVERSA]

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