US govt commits US$800b to unlock lending - WASHINGTON

US govt commits US$800b to unlock lending - WASHINGTON

Fed to buy up to US$600b in housing debt and set aside US$200b for consumer loans

The Fed’s US$200 billion (S$306 billion) lending programme will help banks to extend more credit to consumers and businesses, says Mr Paulson. — PHOTO: REUTERS

WASHINGTON: The United States Federal Reserve took two new steps yesterday to unfreeze credit for homebuyers, consumers and small businesses, committing up to US$800 billion (S$1.23 trillion).
The central bank will purchase as much as US$600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a US$200 billion programme to support consumer and small-business loans, the agency said yesterday.

The Fed will purchase up to US$100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to US$500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae.

‘This action 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 Fed said.

The Fed will also lend up to US$200 billion to holders of AAA-rated asset-backed securities backed by ‘newly and recently originated’ loans, such as for education, cars, credit cards and loans guaranteed by the Small Business Administration.

US Treasury Secretary Henry Paulson said yesterday that the Fed’s lending programme will enable banks to extend more credit to consumers and businesses.

‘I and my regulatory colleagues are committed to using all the tools at our disposal to preserve the strength of our financial institutions and stabilise our financial markets, to minimise the spillover into the rest of the economy.’

The Treasury committed US$20 billion of its Troubled Asset Relief Programme (Tarp) as part of the US$200 billion plan to support consumer and small-business loans.

The programme ‘underscores our support for the housing market’, Mr Paulson said. ‘Nothing is more important to getting through this housing correction than the availability of mortgage finance.’

The efforts by Mr Paulson and Fed chairman Ben Bernanke are the latest attempt to alleviate the credit crunch. Mr Paulson has committed all except US$20 billion of the first half of the US$700 billion Tarp programme, with less than two months before the end of the Bush administration.

‘It will take time to work through the difficulties in our markets and our economy, and new challenges will continue to arise,’ Mr Paulson said.

He has committed US$270 billion to inject capital into banks, including US$20 billion as part of a rescue of Citigroup on Sunday, and brokered a deal providing US$40 billion to insurer American International Group.

In a press conference yesterday, Mr Paulson called for patience in expecting quick results from the effort to recapitalise financial institutions and unfreeze credit markets that have contributed to a slowing in US economic growth.

‘It is naive for any of us to think that when you’re dealing with a situation of this magnitude, that a Bill could be passed or a single action taken to make all the issues go away,’ he said.

Policymakers are aiming to prevent a financial collapse and stamp out the threat of deflation.

‘They’re trying to put funds into the system, trying to unfreeze these markets,’ said Mr William Poole, the former St Louis Fed president, in an interview with Bloomberg Television. ‘Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.’

The Dow was 59.58 points lower at 8,383.81, after two hours of trading.

BLOOMBERG, REUTERS

Source : Straits Times - 26 Nov 2008

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