U.S. Considering Expanding the TALF Program

The administration is trying to expand consumer lending

March 18 (Bloomberg) — The Obama administration is considering using a new Federal Reserve program designed to spur consumer lending to help remove distressed assets from banks’ balance sheets, according to people familiar with the matter.

Officials may meld the Treasury’s plan to set up private investment funds to buy frozen assets with a Fed program originally aimed at spurring consumer loans, the people said. The Federal Deposit Insurance Corp. may also get a wider role, the people said.

Treasury Secretary Timothy Geithner may use an array of approaches to maximize the likelihood of cleansing banks’ balance sheets so they can start lending again. The next announcement, which may come as soon as this week, will be critical after Geithner’s first unveiling of the strategy caused a sell-off in financial stocks.

“The markets are just getting increasingly nervous, the longer they wait to announce the plan,” said Stephen Myrow, a former Treasury official in the Bush administration who helped create the Fed’s program.

The Fed’s Term Asset-Backed Loan Facility, or TALF, would provide loans to investors and agree to take illiquid debt as collateral, the people said. It would be used alongside the Treasury’s planned public-private investment funds.

Current TALF

As it’s currently set up, the TALF may lend as much as $1 trillion to investors from hedge funds to pension funds and insurance companies to buy recently created securities backed by loans for car purchases, college education and real estate. Applications for its first loans are due tomorrow.

Broadening the TALF to include older, illiquid and lower- rated securities could allow the participants in the public- private investment funds to potentially repackage assets and sell them on to a wider group.

The FDIC’s role may also expand to help finance the administration’s initiative, and perhaps to run an aggregator- type unit that would purchase whole loans — those not packaged into other securities — three people said. FDIC officials have extensive experience dealing with nonperforming loans from their role in taking over failed banks.

Treasury spokesman Isaac Baker, Fed spokeswoman Michelle Smith and Andrew Gray at the FDIC declined to comment.