Federal Reserve Actions in Support of TARP


After completing Part 3 of my series on TARP, I realized the story was incomplete without covering complementary actions taken by the Federal Reserve. Unlike Treasury, the Fed does not require Congressional approval for its actions. In fact, the Fed is structured to have considerable independence in hopes that its policies will not be politically motivated.

Selected Federal Reserve Assets and Liabilities

To see what the Fed has been doing to counter the credit freeze and global recession, it is useful to examine its balance sheet. Table 1 includes selected balance sheet items for two dates – before and after the credit freeze/global recession.

Table 1 – Federal Reserve: Selected Balance Sheet Items

Federal Reserve Banks (in mil. US$) Jan. 4, 2007 July 29 2010 % Change
Reserve Bank Credit                                    859,699 2,308,212 168%
Mortgage-backed securities (Ginnie, Freddie, and Fannie)   1,117,474  
AIG – Total   118,309
    Credit extended, net 23,449
    Net portfolio holdings of Maiden Lane LLC 29,417
    Net portfolio holdings of Maiden Lane II LLC 16,170
    Net portfolio holdings of Maiden Lane III LLC 23,540
    Preferred interests in AIA Aurora LLC and ALICO Holdings, LLC 25,733
Term Asset-Backed Securities Loan Facility (TALF)   40,617
U.S. Treasury, supplementary financing account 199,961
Reserve balances with Federal Reserve Banks            13,237 1,048,392 7820%

Source: Federal Reserve: Table H.4.1

Bernanke has kept the printing presses rolling: Reserve Bank credit has increased by 168% or $1.4 trillion since 2007. How has this credit been used? The Fed has played a major role in keeping the Federal Housing agencies afloat by purchasing $1.1 trillion of their mortgage-backed securities. AIG currently has a loan of $23+ billion from the Fed. In addition, the Fed has purchased $95 billion of AIG’s holdings.

The Asset-Backed Securities Loan Facility (TALF) was created on November 25, 2008. It functioned in a similar manner to the Treasury’s PPIP program covered in Part 1 of my series on TARP. From the outset, TARP was not popular with many economists, and it is being terminated. The Fed has also made sure that its branches and the Treasury had plenty of liquidity.

What should happen to the Federal agency and AIG assets held by the Fed? Probably the best thing would be to wait a while. There is a real estate cycle, and at some point it will turn up again.

As indicated in my assessment of TARP, I believe more use should have been made of the Fed’s ability to make and guarantee loans at the outset of the banking crisis. Paulson only used the Fed to bail out AIG when the crisis hit. Three important weeks were then wasted as the credit crunch worsened before TARP was authorized by Congress.

The content above was saved on the old Morss Global Finance website, just in case anyone was looking for it (with the help of archive.org):
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