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Bid Day in Bailout Land

Posted by: Ben Levisohn on November 25, 2008

Despite spending over $300 billion of the $700 billion allotted by Congress, the Treasury department’s TARP program has done little to get banks lending. But fear not — the FDIC and the Federal Reserve are treading where Treasury fears to go, with new moves to free up credit markets and the first government guaranteed bond hitting the market.blogmoney.jpg

Let’s take the bonds first. The FDIC announced on Friday Nov. 21 the final rules for its bond payment guarantee program to help big banks roll over debt coming due in the next few years. First out of the gate is… Goldman Sachs. Did you expect anyone else? Goldman issued $5 billion in US government guaranteed debt, more than the $2-$3 billion originally expected. Citigroup, JP Morgan Chase, Morgan Stanley, and Bank of America are expected to join soon. The money is expected to allow the banks to pay off debt coming due in the next two to three years.

Of course, big Wall Street firms aren’t the only ones with debt coming due, and it remains to be seen whether banks loan any of the FDIC-backed money to consumers and business – or just stash it in the safe with the TARP funds they’ve already received. If the latter, it doesn’t bode well for other companies needing to refinance between 2011 and 2014, when medium term loans made in 2006 and 2007 – when more than $1 trillion of such debt was issued — come due. Ouch.

But that problem’s still down the road. Right now, the Fed needs to get consumer lending going again, and if TARP’s not going to work, then something else will have to. Hence, the announcement that the Fed would start buying $500 billion in mortgage backed securities from Fannie Mae, Freddie Mac and Ginnie Mae, while creating a new unwieldy acronym, TALF (don’t ask), to lend money against new and recent securities backed by the credit card, student, small business, and auto loans of the highest rated borrowers. If all goes as planned, banks will start lending again to consumers, investors will buy the securities, and the U.S. government will ensure the securities have value. Will it work? Your guess is as good as mine. But rates on mortgage-backed securities appear to be falling — and that bodes well for consumer mortgage rates. Let me know if you’ve had any luck getting a loan.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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