Keep the parcel

25 November 2008

Its plan to buy $600bn of mortgage bonds and lend $200bn against other ABS may get funds flowing. But the schemes don t spur banks to abandon their troublesome originateanddistribute strategies and could distort the market. It would be better to inject more capital into banks.

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The US Federal Reserve announced plans to purchase mortgagerelated debt from the governmentsponsored enterprises, including Fannie Mae and Freddie Mac. The government will buy up to $100bn of GSE debt and $500bn of mortgagebacked securities sold by the companies.

The Fed also announced a programme to lend up to $200bn to investors in tripleA rated asset backed securities backed by new consumer and small business loans. The loans will be collateralised by the ABS. The plan, called the Term AssetBacked Securities Loan Facility (Talf) will receive $20bn in credit protection from the US Treasury's Term Asset Relief Programme.

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