Fed program to boost consumer lending sees low response

The Federal Reserve's attempt to jump-start consumer lending needs a jump-start itself.

The Fed today said investors requested $1.7 billion in low-rate financing from the central bank to buy securities backed by auto and credit-card loans. That was a sharp drop from the $4.7 billion investors sought in the first round of the so-called Term Asset-Backed Securities Loan Facility, or TALF, last month.

Fed Chairman Ben S. Bernanke had high hopes for this program, which is aimed at encouraging banks to expand consumer lending by reviving the securitization market for such loans. The central bank has said the program could fund up to $1 trillion in new lending over time.

The basic idea: Investors can get cheap Fed money to buy up securities backed by consumer loans and funnel cash back to banks for additional lending.

But investors appear to be balking, despite the easy financing -- and the potentially high returns that implies for buyers of the securities.

From Reuters:

"The expectation was that it would be bigger in the second round," said Ron D'Vari, chief executive and co-founder of New York asset management firm NewOak Capital. "At the current level it would take something like 60 years to fill the $1-trillion size of the Fed's program."

Analysts said worry that terms of the program could be retroactively changed, combined with uncertainty about whether other government programs might offer up a better deal, kept investors on the sidelines.

Lingering issues surrounding the terms of participation, including restrictions on borrowers on the hiring of foreign workers, likely also dampened appetite for the loans.

But another issue is that the raw material for the program is lacking: There’s no rush to create new asset-backed securities that could be financed under the TALF program, a sign lending remains limited.

From Reuters:

Issuance of TALF-eligible securities was minimal, with only five deals worth a total of about $3.2 billion. That was substantially short of last month's $8.2 billion of eligible securities.

The tough economic backdrop may also have contributed to the anemic showing, with consumers fretting about their jobs likely to hunker down rather than take out the new loans that could be packaged into asset-backed securities, analysts said.

Separately, the Fed reported today that consumer credit outstanding fell $7.5 billion in February, led by a decline in credit card debt. It’s impossible to tell, though, how much of that decline is related to consumers who decided to reduce debt on their own and how much is tied to banks’ moves to cut off borrowers.

-- Tom Petruno

Photo: Fed Chairman Ben S. Bernanke on Capitol Hill last month. Credit: Brendan Smialowski / Getty Images

 

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