The Federal Reserve announced two significant initiatives today intended to improve the state of the U.S. economy and the availability of credit. The Fed announced the creation of the Term Asset-Backed Securities Loan Facility (TALF) to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA). Additionally, the Fed will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs) – Fannie Mae, Freddie Mac, and the Federal Home Loan Banks – and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae.

Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend a maximum of $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department – under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008 – will provide $20 billion of credit protection to the FRBNY in connection with the TALF.

Under the direct purchase initiative, beginning next week, the Federal Reserve's primary dealers will conduct purchases of up to $100 billion in GSE direct obligations under the program through a series of competitive auctions. Asset managers selected via a competitive process will conduct purchases of up to $500 billion in MBS, with a goal of beginning these purchases before year-end. The Fed expects purchases of both direct obligations and MBS to occur over several quarters. The Fed will provide further information regarding the operational details of this program after consultation with market participants.