Fed moves to ease credit market tensions

US launches 'Talf' as Geithner faces criticism
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The Independent Online

Investors snapped up parcels of car loans from the auto maker Nissan yesterday, in the first test of the US government's new plan to kick-start the stalled securitisation market. Nissan sold $1.3bn of bonds under the Federal Reserve's $1trn term asset-backed securities loan facility, or Talf, which has become the centrepiece of efforts to tackle the credit crisis and make it easier for consumers to borrow money.

The strong demand provided another glimmer of hope for credit markets, a day after the Fed shocked the system with a big injection of cash that was still driving down mortgage rates yesterday.

Investor demand was such that Nissan will have to pay a lower interest rate than it expected, and analysts said that this could encourage other lenders to step back in. The easier it is to sell the loans in the securitisation market, the more money can be freed up to lend to another wave of consumers.

Also yesterday, Citigroup said that it would sell $3bn of securities backed by credit card loans. "Anything that increases the depth of the credit markets can only be viewed positively," said John Lonski, economist at Moody's Investors Service. "Taking the Talf together with the Fed's other prog-rammes, I think there is a reasonable chance of the US economy stabilising by the summer."

Under the Talf, investors such as hedge funds can borrow from the Fed at a low interest rate in order to buy asset-backed securities, such as bonds backed by car loans, student loans, credit cards and small business loans. It was not immediately clear, however, if much of the demand for Nissan's bonds came from investors who had borrowed federal money.

The launch of the Talf scheme has been plagued by delays and investor scepticism, as hedge funds wrangled over the legal details of contracts with the Fed. Concern has grown sharply in recent days because of the furore over the bonuses at AIG, the insurer being propped up by the US government. Hedge fund investors are concerned that they, too, could become the focus of public anger and political interference if they are seen as making private profit from taxpayer money.

The Fed has promised to lend an additional $200bn through the Talf, scaling the scheme up to $1trn over time. It still expects investor interest to ramp up, but the initial launch this week has been much smaller in scale than originally hoped. The Talf was the furthest advanced of the four prongs to tackling the credit crisis that US Treasury Secretary Tim Geithner outlined last month, an announcement that left markets disappointed with its lack of clarity.

Credit markets were still responding yesterday to the additional $1.15trn that the Federal Reserve said on Tuesday it would spend buying mortgage-backed securities and US Treasuries. Yields on long-term US government debt, which took their biggest one-day tumble since the Sixties on Tuesday, were lower again yesterday, and a number of mortgage lenders said they would start issuing 30-year mortgages with an interest rate of just 4.5 per cent.

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