WASHINGTON — In one of the Federal Reserve Board's most expensive endeavors yet to resuscitate financial markets, the central bank said Tuesday that it will work with the Obama administration to lend up to $1 trillion against consumer-related securities.
The plan makes the Term Asset-Backed Securities Loan Facility's price tag five times as large as the $200 billion the Fed initially committed when the program was announced in November. The Treasury Department is quintupling its stake, to $100 billion.
The program has emerged as a central pillar of the Obama administration's efforts to revive the economy, and Treasury Secretary Tim Geithner said Tuesday that its expansion would "kick-start the secondary lending markets to bring down borrowing costs and to help get credit flowing again."
Under the program, the Fed lends to investors, which use the money to buy securities backed by consumer loans. The goal is to liquefy the markets for consumer debt by providing an incentive for investors to buy the securities.
But critical aspects of the program remain unclear. Chief among the questions is exactly which types of assets the Fed will finance.
A term sheet released by the Treasury said the new initiative "will expand the initial reach of the Term Asset-Backed Securities Loan Facility to now include commercial mortgage-backed securities." But the Fed was more tentative in a separate announcement, saying it "could broaden the eligible collateral to encompass … commercial mortgage-backed securities."
Fed Chairman Ben Bernanke told lawmakers Tuesday that commercial MBS was a "strong candidate" for inclusion under Talf.
Both the Fed and the Treasury left the door open to making residential mortgage-backed securities eligible. The Fed had previously agreed to purchase securities backed by auto, card, and student loans. Also left unanswered was when the Fed would begin making these purchases. When the original program was announced last fall, the central bank said it would launch in February, but Fed and Treasury officials have not offered anything more specific.
The Treasury and Fed both point out that investors may use the loans only to buy securities that have been issued since Jan. 1 and carry triple-A ratings.
But highly rated assets have had a habit of being downgraded during the financial crisis, leaving many observers unimpressed about the holdings the Fed would be taking on.
"The rating agencies have done a miserable job and have done nothing to revamp their methodologies," said Chris Low, the chief economist at First Horizon National Corp.'s FTN Financial Capital Markets. "But there's no other way right now to judge assets apart from independent research, and the Fed just doesn't have the resources to do that right now."
The expansion also will take the Fed beyond its traditional bailiwick of banking and into the realm of hedge funds, which are active in the market for asset-backed securities. But many observers said the shift is necessary.
"If you want to loosen credit, you're going to have to provide liquidity to more than just the banks," said Ron Glancz, a partner at Venable LLP. "I have some concern that federal programs apply to unregulated institutions without proper controls, but I assume … that the Fed is going to protect itself when it makes these loans."
As he unveiled the government's latest efforts to rein in the financial crisis, Mr. Geithner acknowledged that the Obama administration is taking risks.
"I want to be candid," he said. "This strategy will cost money, involve risk, and take time."
The Talf expansion was announced as Mr. Bernanke appeared before the House Financial Services Committee to explain the various liquidity facilities the Fed has created since the crisis began. He reassured lawmakers that the lending programs "have been set up to minimize credit risk to the Federal Reserve."
Still, he said any risk the central bank has assumed is necessary to support the banking system and the financial markets.
"The financial risks inherent in the credit extended by the Federal Reserve were, in my view, greatly outweighed by the risks that would have been faced by the financial system and the economy had we not stepped in," he said.