by James Copenhaver, Director of Investment Management, Wealth Enhancement Group

The Federal Reserve and the US Congress have taken several remarkable actions over the past nine months to address the credit and banking problems facing the nation. Now is a good time to review the purpose and description of the major programs to understand the scope of these actions.

The Financial Stability Plan, along with the American Recovery and Reinvestment Act are critical first steps as we work to strike the right balance between promoting public trust, to get credit flowing again to families and businesses, and using taxpayer money prudently to repair the financial system and confidence.

As part of the Financial Stability Plan, the Treasury department has put in place a series of financial initiatives:  

• A broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure
  
• A new capital program to provide banks with a safeguard against a deeper recession
  
• A major new lending program with the Federal Reserve targeted at the securitization markets critical for consumer and small business lending
  
• A program to set up funds to provide a market for the legacy loans and securities that currently burden the financial system

Troubled Assets Relief Program (TARP) was established under the Emergency Economic Stabilization Act (EESA) with the specific goal of stabilizing the United States financial system and preventing a systemic collapse.  Among other capital infusion the TARP program provided 100s of billions of dollars to the Banking System and insurance companies such as AIG.

Public –Private Investment Program (PPIP) was created to address the challenge of legacy assets (the media calls them toxic assets). The Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – have announced the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to households and businesses, large and small.

Term Asset-Backed Securities Lending Facility (TALF) will work together with the PPIP program for legacy assets (toxic), but they remain separate. The Legacy TALF will be a Federal Reserve lending program with its own set of terms, conditions and eligibility requirements. A qualified investor utilizing Legacy TALF will do so on the same terms and conditions as a Legacy Securities PPIP investor utilizing Legacy TALF, making the funding of legacy assets available to a broad range of market participants.

Secretary of the Treasury, Geithner stated, “Our goal must be a stronger system that can provide the credit necessary for recovery, and that also ensures we never find ourselves in this type of financial crisis again.”