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

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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

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The majority of monetary policy programs stayed the same.  Fed Funds rate will continue to be held at a record low of 0 – 1/4% for an “extended period.”  The programs to purchase up to $1.25 trillion of agency, GSE (Freddie, Fannie, etc), mortgage-backed securities and up to $200 billion of agency, GSE, debt will continue until the end of 2009 as originally stated in the March 18th announcement.

There has been a change in the program regarding the $300 billion of US Department of Treasury Debt to be purchased, essentially debt monetization.  “…the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.” 

The purchase of $300 billion Treasuries was originally planned to end by September, but now will be extended an extra month.  They word the addition of one month to the Treasury purchase program as follows, “the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.”

The statement then ends with the usual reassurance the Committee will continue to monitor and evaluate its actions based on the changes occurring in the markets and will adjust accordingly.

Federal Reserve Open Market Committee Monetary Policy Announcement Aug 12 2009: http://joeyconway.com/hcrgt6

Bloomberg Article: http://joeyconway.com/w87vt8

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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

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Situation: The Federal Reserve is one of Wall Street’s biggest customers.  There are many markets but for the mortgage-backed securities (MBS) market, the Fed purchases more bonds in this market than any other party.  In fact, as of last Thursday, the Fed claimed to hold $542 billion on its balance sheet in MBS.

Regarding the Federal Reserve’s role as a player in the markets, from the FT article, “A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them (the Fed). Their transparency hurts them. Everyone picks their pocket.”

Now in response to this, from the FT article, Senator ”Barney Frank, chairman of the House financial services committee, said the potential profiteering may be part of the price for stabilising the financial system. “You can’t rescue the credit system without benefiting some of the people in it.”

Now to help clarify the justification Barney Frank provides, from the FT article, “…another official familiar with the matter said the central bank “has heard that dealers load up on securities to sell to the Fed. There is concern, but policy goals override other considerations.”

At the very least, we are told, policy goals override any other considerations implying we shouldn’t be concerned if one group of people benefit at the expense of another.  We are told, one group of people may benefit  (profiteering) from the federal government’s intervention, but it is justified because the end goal is to stabalize the financial system. 

Can the financial system be stabalizied without profiteering?

Financial Times Article: http://joeyconway.com/s5nd6c

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“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

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