Finance & Business World

Treasury’s $700 billion bailout has gotten most of the nation’s attention, but some of the government’s lesser-known programs are doing their part to help ease credit as well.

Two new government programs aimed at easing short-term liquidity concerns for financial institutions have started to take hold. The first, the Federal Reserve’s Commercial Paper Funding Facility, allows companies to sell highly rated 3-month debt to the government in exchange for ultra-low interest rates.

A Fed report released Thursday showed that the key market for business lending has expanded for the sixth straight week.

The amount of so-called commercial paper that was sold in the seven days ended Dec. 3 rose by $11.6 billion, or 1%, to a seasonally adjusted $1.7 trillion, the report said.

Commercial paper is short-term debt that big businesses and financial institutions issue to fund day-to-day business operations. Long considered a safe and liquid investment, the debt is bought chiefly by conservative investors such as money-market funds.

But when the credit crisis hit in mid-September, funds began to invest in even safer assets, leaving many businesses in dire need of short-term financing.

"Investment committees for money market funds were worried that they might be investing in the next Lehman," said Bill Larkin, portfolio manager at Cabot Money Management. "They got out of the commercial paper market, and now they’re buying mostly government bonds."

As a result, on Oct. 20, the Fed began buying up commercial paper to help businesses meet their funding needs.

A separate Fed report showed that the government bought nearly $10 billion of commercial paper over the past week. It was the second week in a row in which the overall market expanded faster than the Fed’s weekly purchase rate, suggesting the program has begun to attract private borrowers.

"The program has helped, but the commercial paper market may never come back to the way it was," Larkin said. "That’s where the FDIC’s new program can fill the void."

That second program, the Temporary Liquidity Guarantee Program, allows the FDIC to guarantee the payment of newly issued unsecured bank debt with greater than a one-month maturity, in exchange for a nominal fee payday loans online.

The FDIC will guarantee a bank’s issuance of debt, usually in the form of corporate bonds, for up to 125% of a bank’s total debt outstanding as of Sept. 30 that was scheduled to mature on or before June 30, 2009.

In just its second week, the FDIC’s guarantee program has attracted numerous participants, including Citigroup (C, Fortune 500), General Electric (GE, Fortune 500)’s finance division GE Capital, JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), Bank of America (BAC, Fortune 500) and Goldman Sachs (GS, Fortune 500), which only two months ago applied for "bank holding company" status so it could receive government aid for banks.

Bank of America has issued $9 billion in bonds under the program. Citi issued $5.5 billion, and Goldman and JPMorgan issued $5 billion. Wells Fargo sold $6 billion. GE has not yet issued bonds, though it said it was approved for $139 billion of FDIC guarantees.

The program has thus far guaranteed more than $40 billion in bonds, and Larkin believes the program will eventually guarantee more than $200 billion.

Early indications show the plan is working. Corporate bond yields are down, making lending cheaper for businesses. And credit default swaps, insurance contracts on debt, are also much less expensive.

For instance, credit default swaps on Citigroup bonds were running at about 5% of the bond’s price just before the program started, and the insurance cost just 2.6% Thursday.

The guarantee program will remain critically important if companies remain unable to finance short-term debt through the commercial paper market after the Fed program expires. Larkin believes the FDIC program could help in the long run when the commercial paper market might not be able to.

"Risk-averse people are happy, because they’re really looking for places to put their money," said Larkin "The FDIC program is giving institutions access to these crucial markets again." 

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Lobbyists are pushing the Treasury Department to consider a plan to purchase mortgage-backed securities in the hopes of driving mortgage rates to as low as 4.5%, an industry source said.

Similar to an effort unveiled last week by the Federal Reserve, the proposal calls for Treasury to buy securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac. Details on the plan remain sketchy, but an announcement could come as early as next week, the source said.

The increased demand for mortgage-backed securities would prompt mortgage rates to drop. That, in turn, would enable homeowners to refinance into lower-cost loans and make it cheaper for potential homebuyers to get into the market.

Spokeswomen from Treasury and the Federal Housing Finance Agency, which oversees Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), declined to comment.

Last week’s Fed move drove mortgage rates down to 5.5%, from 6.06% a week earlier. The Fed said on Nov. 26 that it would purchase up to $500 billion in mortgage-backed securities from Fannie, Freddie and Ginnie Mae, and that it would buy another $100 billion in direct debt issued by those firms.

Mortgage applications more than doubled as a result, the Mortgage Bankers Association said Wednesday. Much of the activity stemmed from homeowners looking to refinance.

Industry groups have been pressuring President-elect Barack Obama and lawmakers to lend a helping hand to the housing market. The National Association of Realtors, for instance, has called for Treasury to buy mortgage-backed securities.

Meanwhile, a coalition of industry groups have banded together under the "Fix Housing First" banner to call for measures including tax credits of up to $22,000 and the creation of a 30-year mortgage, carrying rates as low as 2.99%.

Experts, however, had mixed views on how much a new Treasury initiative would help homeowners and the economy cash advance loan. Some felt lower rates would help stabilize the housing market by bringing in new buyers and would give those who refinance more money to spend.

"If it gets people buying homes and spending, it will help reverse the economy and get us out of this recession," said Scott Talbot, senior vice president of the Financial Services Roundtable, which is pushing the measure.

While it takes time to entice new buyers into the market, low rates accelerate that process, said Greg McBride, senior financial analyst at Bankrate.com.

"It is clearly designed to bring buyers into the marketplace and soak the inventory of unsold homes," he said.

But others questioned whether rates would remain low and, even if they did, only a narrow slice of credit-worthy borrowers would benefit.

Rates are already inching up, hitting 5.75% on Wednesday, said Keith Gumbinger, vice president of HSH Associates. Several government attempts to lower mortgage rates this year have failed to have a lasting effect.

Also, the proposal would do little to help troubled borrowers who have fallen behind on their payments, have no equity in their homes or have lost their jobs. With credit standards still high, these homeowners would not be able to refinance and take advantage of the lower rates, he said.

Finally, super-low rates could keep private investors out of the mortgage-backed securities market, forcing the government to remain the primary buyer of such investments, Gumbinger said. Rates have not fallen below 5.37% in more than 45 years.

"I can’t imagine there will be a significantly active marketplace of people who want to buy at these low rates," he said. 

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Australia has room to lower interest rates further and increase government spending to support the economy amid the current global crisis, former central bank Governor Ian Macfarlane said.

Reserve Bank of Australia Governor Glenn Stevens, Macfarlane’s successor, cut borrowing costs by 1 percentage point yesterday to a six-year low of 4.25 percent, extending the biggest round of reductions since 1991. While economic growth last quarter was the slowest in eight years, Australia has so far avoided a recession, unlike the U.S., U.K., Europe and Japan.

“We have scope to move both monetary and fiscal policy in an expansionary direction,” MacFarlane told a gathering of the Lowy Institute for International Policy in Sydney today. “Australia is better placed than any other Organization for Economic Cooperation and Development country I can think of.”

Australia’s government has posted budget surpluses for most of the decade and the central bank’s key overnight cash rate is more than four times higher than the U.S. Federal Reserve’s benchmark rate, and 100 basis points higher than the European Central Bank’s 3.25 percent key rate. To buttress the economy, Prime Minister Kevin Rudd said last week he may allow the government’s budget to slip into deficit.

Macfarlane, the head of central bank between 1996 and 2006, said while the global credit crunch means there is a need for tougher rules, there is “no point in moving to a tougher regulatory regime until we get the present mess sorted out.”

‘Immediate Need’

“The immediate need is to get credit flowing again,” said Macfarlane, who is an adviser to Goldman Sachs Group Inc. “We must return to a situation where lenders will be prepared to take the normal commercial risks, without which no economy can function.”

From an international perspective, Macfarlane said the current situation is more serious than the dot-com bubble, the 1998 Long Term Capital Management hedge fund bailout, the Asian financial meltdown a decade ago, the mergers-and-acquisition bubble of the late 1980s, the 1987 share market collapse, the 1980s U Free Credit Report and Score.S. savings and loan crisis, and the so-called third world debt crunch of the early 1980s.

“We have never seen such a freezing up of lending between the banks before, and we have never seen a situation where in the U.S., the U.K. and Europe, so many banks and other financial institutions have had to be fully or partially nationalized in order to prevent their collapse,” he said.

Macfarlane said the crisis has also “invalidated” the model of a deregulated financial system that has operated in recent decades by transmitting instability among banks to the wider economy.

U.S. Tarnished

“It has failed the market test: it has lost its owners, that is shareholders, vast amounts of money,” Macfarlane said. “It has also greatly reduced the moral authority of the U.S. in international financial affairs.”

Stevens, who lowered borrowing costs by three percentage points since September, said yesterday that monetary policy is now “expansionary” to help restore consumer and business confidence amid a 44 percent plunge in the benchmark S&P/ASX 200 stock index and the biggest decline in home prices since 1978.

For Australia, the global turmoil has been less serious, Macfarlane said. “Our banks remain well-capitalized, profitable and not exposed to subprime mortgages locally or in the U.S.,” he said.

“Mortgage arrears in Australia are miniscule by world standards and most of the corporate sector is moderately geared,” the former governor said. “If we had to make a judgment on whether our system was fundamentally unstable, we would have to say we see no evidence to suggest it.”

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Chancellor Angela Merkel swept aside calls to cut taxes now rather than wait until after next year’s national election, saying that her party “must have the courage to swim against the tide” to tackle the economic slowdown.

A meeting of her coalition on Jan. 5 will review the economic situation and consider whether further steps are needed to mitigate the worst recession in 12 years, Merkel said today in a speech to a convention of her Christian Democratic Union in Stuttgart.

“Germany will keep all its options open to combat the impact of the global crisis effectively,” she said. “I emphasize: all options.” At the same time, “what we won’t do is undertake a structural overhaul of the tax system.” Instead, any measures will be “temporary economy stimuli that have immediate effect.”

The chancellor’s resistance to immediate tax cuts flies in the face of calls from industry, economists and sections of her own party to provide a fiscal stimulus to help the economy, Europe’s biggest, ride out the global downturn. Retail sales unexpectedly fell in October, the Federal Statistics Office said today, suggesting a more severe recession than first predicted.

Election ‘Promises’

“Merkel wants to keep her tax gifts as promises for the election — that’s irresponsible and possibly even a grave mistake,” Thomas Mayer, chief European economist at Deutsche Bank AG in London, said in an interview. “The economy is faltering and she needs to stimulate private consumption, which has been stagnating for years.”

Merkel’s position was strengthened after leading party members yesterday backed her proposal to postpone any tax overhaul until after the national election in September 2009. She received further support today when she was re-elected party chairwoman with 94.8 percent of the ballots cast, an increase on the 93.1 percent backing she won in 2006.

Still, Germany has attracted criticism from economists and international media for the value of its stimulus measures in comparison to other countries. Merkel’s Cabinet last month agreed on a program of measures costing 32 billion euros over two years, equivalent to 1.3 percent of its gross domestic product, the chancellor said today. That compares to Italy’s 80 billion-euro package and a program of 38 billion euros in Spain.

‘Senseless Competition’

Germany won’t get into a “senseless competition” with other countries over how many billions to spend bolstering the economy, Merkel said.

In Britain, Prime Minister Gordon Brown’s government last week reduced the U.K.’s sales tax to 15 percent from 17.5 percent to spur consumer demand. Merkel should follow suit with a temporary cut in value-added tax, a sales tax, to stimulate purchases of goods from cars to computers, according to Deutsche Bank’s Mayer. “The U.K.’s move to cut VAT is the right in decision in the wrong country,” he said payday loans cash.

Bild, Germany’s biggest-selling newspaper, meanwhile urged Merkel in today’s edition to emulate Ludwig Erhard, “the father of Germany’s economic miracle” after World War II, and “save prosperity for all.” Lowering taxes “offers hope” to consumers and business, Bild cited Erhard as having said.

“The earlier the reform of taxes, the better for growth and jobs,” Economy Minister Michael Glos, from the CDU’s Bavarian sister party, the Christian Social Union, said in an editorial published today on the ministry Web site.

Glos joins Merkel’s five independent economic advisers, or “wise men,” who called on the government in their annual report published Nov. 12 to stimulate the economy by increasing disposable income. They urged additional measures of as much as 1 percent of GDP, or about 25 billion euros, on top of the program already agreed on.

‘Year of Bad News’

“Germany will continue to analyze the economic situation,” Merkel told as many as 1,000 delegates registered for the convention. “Since we know that 2009 will be a year of bad news, we will with our stimulus measures build a bridge for investment and employment, a bridge for our citizens and companies, ensuring that recovery takes place in 2010.”

The Social Democrats, Merkel’s coalition partners and rivals at next year’s election, oppose tax cuts, arguing that the government should hold to its commitment to balance the federal budget.

‘Gunpowder Dry’

“We should keep our gunpowder dry for now,” Foreign Minister Frank-Walter Steinmeier, the Social Democrat who will be Merkel’s opponent for the chancellorship, said in an interview today with the newspaper Handelsblatt. “I’m skeptical of taking a watering can and spreading benevolence across the country — that goes for tax cuts for people who seem to be able to save enough already.”

The coalition’s economic-stimulus package and 500 billion- euro bank-rescue program have already forced it to abandon a plan to balance the budget by 2011. The government will not “lose sight” of its budget goal, and will pursue the target in the next legislative period after the election, Merkel said.

Merkel, whose party faces a state election in Germany’s financial heartland of Hesse on Jan. 18, followed by three more state elections in August before the national vote in September, said 2009 will be a “super-election year.”

Even so, faced with the global economic crisis, “electioneering by the main parties is definitely on a low flame right now,” Hans-Juergen Hoffmann, managing director of Berlin-based polling company Psephos GmbH, said in an interview. “The parties have to pull together and voters know this.”

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