The Federal Reserve announces that it 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 backed by Fannie Mae (FNM), Freddie Mac (FRE), and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally. Purchases of up to $100 bln in GSE direct obligations under the program will be conducted with the Federal Reserve's primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 bln in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters. Further information regarding the operational details of this program will be provided after consultation with market participants.
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WSJ reports Treasury Secretary Henry Paulson, seeking to ease strains in the consumer credit market, plans to announce Tuesday the formation of a program to increase the availability of auto loans, student loans and credit cards, according to people familiar with the matter. The lending facility, which will be operated by the Federal Reserve, is expected to provide loans to investors who want to buy securities backed by credit cards, auto loans and student loans, these people said. Treasury will contribute between $25 billion to $100 billion to the facility from its $700 billion Troubled Asset Relief Program. The program is aimed at making it easier for consumers to borrow money. Government officials, including Mr. Paulson, have grown concerned about "distress" in the consumer finance market, as the availability of household loans has ground to halt amid a broader credit crunch. While the initial focus will be on consumer loans, the facility could eventually be expanded to cover all manner of assets, including mortgages.
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Bloomberg.com reports that the Bank of England Governor Mervyn King said U.K. financial institutions may still need more capital and the "single most pressing challenge" facing policy makers is to revive the flow of credit through the economy. "We may not have come to the end of recapitalization. We should not shy away from that if that proves to be necessary." The Bank of England and Prime Minister Gordon Brown's government are trying to revive lending and shore up economic growth with interest-rate cuts, the biggest budget giveaway since the late 1980s and a multi-billion pound bailout for the financial system. Royal Bank of Scotland Group (RBS), Lloyds TSB Group (LYG) and HBOS have taken 37 bln pounds ($56 bln) of government funds as part of a plan to stabilize the banking industry. King said failing to get banks lending again could raise the risk of deflation and stoking credit growth is "more important than anything else at present." He also said the Bank of England would have to cooperate closely with the Treasury if it was forced to cut its benchmark interest rate to zero.
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WSJ reports New Jersey's pension fund, already in the spotlight thanks to losing investments this year in large banks, is under fire again, this time over a series of controversial hedge-fund investments that initially swept below the public radar. New Jersey made the investments last month, to funds run by BlackRock, Canyon Capital Advisors and GoldenTree Asset Management, as they were "facing the equivalent of margin calls," William Clark, director of the New Jersey Division of Investment, said in an interview Monday. In effect, the funds, which had borrowed money for investments, either faced or anticipated facing demands from lenders for cash as the value of those investments fell. State legislators, upon learning of the investments, are questioning both the wisdom of the decisions as well as the process: At $49.5 million each, the investments came in a hair below the $50 million threshold that requires the fund to explain an investment to an oversight board before moving forward.
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