The Fed’s move today to lend up to $200 billion against mortgage backed securities comes as close as one can without an act of Congress to affirming the implicit Federal guarantee of Freddie Mac and Fannie Mae debt. Its new facility, the Term Securities Lending Facility, will lend to primary dealers through 28 day auctions, exchanging Treasuries for mortgage-backed debt.
Note that this program also includes AAA rated non-agency debt. We noted last night that S&P and Moody’s are maintaining AAA ratings on subprime debt that is most decidedly not AAA according to their own standards. Before, we thought that concerns that the Fed was taking on toxic collateral were overblown. Given this new facility, and the failure of the rating agencies to give accurate grades, we will see the Fed lending against some less that terrific assets under this program (though the amounts may in the end prove to be minor).
This move also lowered somewhat expectations for Fed fund rate cut of 100 basis points to 2 percent, and raised odds of a 75 basis point cut to 60%.
As Steve Waldman tells us, this program will leave the Fed with $300 to $400 billion for further sterilizing interventions. The new moves, between the measures announced last Friday, and the ones today, have the Fed taking on an additional $340 billion in assets (a $40 billion increase in the TAF, the $100 billion new repo facility announced Friday, and the $200 Treasury/MBS lending program today). The Fed has only one more move like this in its arsenal. Paul Krugman pointed out that the Fed’s last two attempts to calm the credit markets (admittedly neither of them of this scale) did not provide lasting relief.
The Fed may finally be getting the commodities markets message on trashing the dollar. However, we are skeptical that this measure will have sufficient impact in the long run. Subprime mortgage resets peak in August, which leads to an increase in defaults, but foreclosures average 15 months after default. We haven’t even seen the worst of the housing crisis, yet the Fed has already used a great deal of its firepower.
A Bloomberg story details the coordinated international actions:
The Federal Reserve, struggling to contain a crisis of confidence in credit markets, will for the first time lend Treasuries in exchange for debt that includes mortgage-backed securities.
The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions, and officials told reporters the program may be increased as needed. The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems….
The Fed said it will lend Treasuries for 28-day periods in return for debt including AAA rated mortgage securities sold by Fannie Mae, Freddie Mac and by banks….
Last week, the Fed said it would make up to $200 billion available to banks in a separate initiative to help boost liquidity.
The Fed today set up a new tool, the Term Securities Lending Facility, to lend Treasuries to primary dealers for 28- day periods through weekly auctions. The Fed also said it’s increasing the amount of dollars available to European central banks through swap lines.
The Federal Open Market Committee authorized increasing currency swap lines with the European Central Bank and Swiss National Bank to $30 billion and $6 billion, respectively, increasing the ECB’s line by $10 billion and the Swiss line by $2 billion. The Fed extended the swaps through Sept. 30.
The ECB announced it will lend banks in Europe up to $15 billion for 28 days and the SNB announced a similar auction of up to $6 billion. The Bank of England will offer $20 billion of three-month loans on March 18 and hold another auction on April 15. The Bank of Canada announced plans to purchase $4 billion of securities for 28 days…
The Fed’s auctions of Treasuries, which will begin March 27, may be secured by collateral including agency and private residential mortgage-backed securities, the Fed said. The central bank “will consult with primary dealers on technical design features” of the new tool.