The Federal Reserve sharing a $5.8 trillion portion as of September 25th 2009. The following table provides details on the announced limit of the capital committed by the Federal Reserve and the current amount used.

All data provided by Bloomberg.

Bloomberg – Fed’s Strategy Reduces U.S. Bailout Pledges to $11.6 Trillion – http://joeyconway.com/rpyqmf

Around $14.7 billion in eligible asset-backed securities were sold by American Express, Bank of America, General Electric, Nissan, Ford, and GMAC Inc.’s Ally Bank this round.

In August, $6.9 billion was borrowed and $5.4 billion was borrowed in July by Investors through the TALF program.

The TALF program essential subsidizes investor’s purchases of these assets through artificially low interest rates and non-resource structure, Fed takes bulk of the loss if loan goes bad.

CNNMoney.com – Investors Apply for $6.5 Billion in Loans – http://joeyconway.com/xn5sf9

Reuters – Investors Requested $6.4 bln under Fed – http://joeyconway.com/yaxvzs

Financial Times – Fed lends $6.5bn for securities buys – http://joeyconway.com/tmyrvr

AP – Banks borrow more from emergency Fed loan program – http://joeyconway.com/9qqeh5

 There are two types of Liquidity Swaps the Federal Reserve by way of the Federal Open Market Committee has established: Dollar Liquidity Swap Lines and Foreign-Currency Liquidity Swap Lines.

Dollar Liquidity Swap Lines

A few months after the credit crunch first began, December 12^th 2007, the Federal Reserve established agreements with 14 other central banks to provide them with US dollars in exchange for the equivalent amount of their currency for a period of time ranging from overnight to 3 months.  The equivalent amount of their currency is determined by the Foreign Exchange (FX) rate at that point in time and when the swap reaches maturity (overnight to 3 months), the currencies are exchanged at the original FX rate.  Another words, if any of the markets regulated by the other 14 central banks needed US dollars, their central banks would be able to obtain them directly from the Federal Reserve at a fixed rate and for a fixed period.  The Federal Reserve charges a “market-based rate” to the foreign central bank in exchange for this product.  The goal is to assist the other 14 central banks in providing US dollar liquidity to their respective markets.  The 14 other central banks with access to US dollars through this program are: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, Sveriges Riksbank, and the Swiss National Bank.  The FOMC has set this program to expire on February 1^st 2010.  The current amounts of dollars drawn by other banks from the Federal Reserve are reported on their weekly Thursday 4:30pm EST published balance sheet.

Foreign-Currency Liquidity Swap Lines

A year and 5 months after the Dollar Liquidity Swap program, April 6^th 2009, the Federal Reserve announced foreign currency liquidity swaps with 4 other central banks.  Essentially, this allows the Federal Reserve to exchange US dollars for foreign currency at a fixed amount for a fixed period.  In a way, this is exactly opposite the original dollar liquidity swap program.  The goal is to provide the Federal Reserve with sufficient liquidity in the foreign currency for U.S. institutions and markets.  The 4 central banks in this program are: the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank.  These swap lines will extend until February 1 2010.

Federal Reserve Liquidity Program Detials: http://joeyconway.com/5pvp5v

Federal Reserve US Dollary Liquidity Swap FAQ: http://joeyconway.com/m2kxpy

Yesterday, Aug 12th, it announced it will extend the Treasury purchase program until October and keep the current limit of $300 billion.  By extending the deadline for the Treasury purchase program, the Federal Reserve keeps the possibility open it might want to expand the program, if it determines necessary.  As of Tuesday, Aug 11th, it has aquired a total of $252.7 billion out of its $300 billion goal in US Treasury debt according to its balance sheet.

Bloomberg article on $2.7 billion purchase: http://joeyconway.com/zzkb62
Bloomberg Fed Treasury Purchase Ticker: http://joeyconway.com/rffndg
Federal Reserve August 11th Purchase Announcement: http://joeyconway.com/pkzbky

Essentially, the Fed is stating, market participants, without this government program, would not be able to meet the credit needs of households and small businesses.  In simple economic terms, the demand for credit from households and small businesses would not be met with a sufficient supply of credit from market participants.

There are many different ways to approach this situation.  This should be the most straight forward and simple explanation.  Market participants, who are businesses required to turn a profit or they will go bankrupt, will supply credit to these households and small businesses until it becomes too risky resulting in unprofitable loans.  If there is not a sufficient supply of credit in the market, it most likely means supplying credit is not profitable or the risk outweighs the return.  The main risk facing the market participants is that the households and small businesses will default on their credit and the market participants will not make a profit, potentially going bankrupt.

Through this Loan Facility, the Federal Reserve has taken on the role of subsidizing market participants, banks and large investors, thus eliminating some of the downside risk that households and small businesses will default.  Since some of the downside risk has been mitigated by the Fed, the market participants are now in turn willing to supply more credit, make more loans.  The downside risk of potential default by households and small businesses has been transferred from the balance sheet of banks and investors to the Federal Reserve’s balance sheet which is funded through our tax dollars and the Fed’s ability to print dollars. 

CNN Money – Breakdown of TALF Program: To TALF or not to TALF http://joeyconway.com/663n2a

Federal Reserve Definition TALF – http://joeyconway.com/mn5zbc

Federal Reserve TALF F.A.Q. (34 pgs) – http://joeyconway.com/ehnrkp

“To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.”

Essentially the Federal Reserve has announced its forcasted purchases for 2009 which will expand its balance sheet.  It has forecasted for 2009, purchases of up to $1.25 trillion in agency mortgage-backed securities and $200 billion in agengy debt.  It has forecasted from March to September of 2009, purchases of up to $300 billion of longer-term US Department of Treasury securities.  All these forecasted purchases for 2009 will result in a total $1.75 trillion increase of the Federal Reserve’s balance sheet over 2008.

The Fed will need to fund itself in order to purchase all of these securities and debt from the markets.  The Federal Reserve has three methods of funding: the Fed can borrow the funds, the Fed can ask the Treasury to borrow funds, or it can print money/credit commercial banks’ reserve balances at the Fed.

Federal Reserve Press Release on March 18 2009: http://joeyconway.com/krxy8n

US Budget Watch Summary of Press Release:  http://joeyconway.com/94kebt

• $695.758 billion – U.S. Treasury Securities
• $105.915 billion – Federal Agency Debt Securities
• $542.888 billion – Mortgage-backed Securities
• $274.085 billion – Direct Bank Lending (Loans through Discount Window and similiar programs, plus lending through term auction credit)
• $104.347 billion – Bailout Funds for Bear Stearns and AIG
• $87.783 billion – Central Bank Liquidity Swaps
• $68.106 billion – Commerial Paper/Money Market Facilities
• $30.422 billion – Term Asset-Backed Securities Loan Facility (TALF)

Grand Total – $1.9 trillion

WSJ – Federal Reserve Balance Sheet, graph and breakdown: http://joeyconway.com/4y3pwm

Federal Reserve’s Latest Data, released every Thursday: http://joeyconway.com/phze7r