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Tuesday, November 25, 2008

Financial Crisis - Fed rolls second stimulus of over $800 bn

WASHINGTON: The Federal Reserve said Tuesday it will buy up to $600 billion in mortgage-backed assets in another attempt to deal with the financial crisis.

The Fed said it will purchase up to $100 billion in direct obligations from mortgage giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. It also will purchase another $500 billion in mortgage-backed securities, pools of mortgages that are bundled together and sold to investors.

The $600 billion effort on mortgages came as the Fed also unveiled a new program to help unfreeze the market that backs consumer debt such as credit cards, auto loans and student loans.

The program on consumer debt will lend up to $200 billion to the holders of securities backed by various types of consumer loans. Treasury Secretary Henry Paulson had said recently that the government was working on the new program, which will be supported by $20 billion of credit protection provided by the $700 billion bailout fund.

The Fed said that the $600 billion effort to support the mortgage market was being taken to reduce the cost of home mortgages and increase their availability. It said the purchases of the mortgages and mortgage-backed securities would take place over a number of months.

The severe financial crisis that is rocking global markets at the moment began more than a year ago with rising defaults on subprime mortgages, loans provided to borrowers with weak credit histories.

The billions of dollars of losses financial institutions have suffered on their mortgage loans have caused banks to stop making new loans of various types, which almost certainly has helped push the country into a deep recession.

Verdict: This new round of bailout package might help saving financial institutes making them strong and so the overall financial system. Strong financial system could trigger new growth trajectories.

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