TALF Announcement

For release at 8:15 a.m. EST

The Federal Reserve Board on Tuesday announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).

Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department–under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008–will provide $20 billion of credit protection to the FRBNY in connection with the TALF. The attached terms and conditions document describes the basic terms and operational details of the facility. The terms and conditions are subject to change based on discussions with market participants in the coming weeks.

New issuance of ABS declined precipitously in September and came to a halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS soared to levels well outside the range of historical experience, reflecting unusually high risk premiums. The ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans. Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.

TALF Terms and conditions (72 KB PDF)

GSE Announcement

The Federal Reserve announced on Tuesday 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 (MBS) backed by Fannie Mae, Freddie Mac, 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 billion 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 billion 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.

Former Federal Reserve Governor Laurence Meyer and former Fed economist Brian Sack on Monday became the latest central bank watchers to forecast a zero federal funds rate early next year.

In a research note Meyer and Sack, now with Macroeconomic Advisers, said once the federal funds rate reaches zero in January the Fed will “immediately implement non-conventional polices” including “targeted purchases of private assets in markets in which the flow of credit is shut off or severely impaired.”

The target fed funds rate for interbank lending currently sits at 1%, matching the 2003-2004 low. Officials are widely expected to lower the funds rate another 0.50 percentage point when they meet next month.

Meyer and Sack had previously expected officials to stop there with the fed funds rate at 0.5%. But now they expect another half-percentage-point cut in January, joining Fed watchers at J.P. Morgan and HSBC in forecasting a zero Fed funds target.

Meyer and Sack expect the Fed funds rate to stay at zero “at least through the
end of 2009.” They also expect a “significant” fiscal stimulus to be passed.

“These actions will not be able to prevent a difficult economic outcome in coming quarters, but they can play an important role in helping to support a recovery thereafter,” they wrote. – Brian Blackstone

Goldman Sachs economists, who had one of the most bearish forecasts around, just downgraded their estimates to show the economy sinking even further.

GDP will fall an annualized 5% in the current quarter — worse than the previously forecast 3.5% decline — with a contraction continuing through the middle of next year due to “continuing signs of falling domestic and foreign demand, labor market deterioration, renewed tightening in financial conditions and an apparent impasse in fiscal policy pending the transfer of power to the Obama administration in late January,” Goldman economists said in a note to clients Friday morning.

The current quarter remains the worst in the forecast, but the output drops will be far from over this year. Goldman Sachs now estimates annualized declines of 3% in the first quarter of next year (previously estimated as a 2% decline) and 1% in the second quarter of 2009 (previously showing flat GDP). Output in the second half of next year was estimated at 1% on average.

While citing “persistent downside surprises” in part for the lowered estimates in the current quarter, the Goldman economists say “the main reason for the downgrade to our forecast is the policy impasse that has developed in Washington and the tightening in financial conditions it has provoked. It is now reasonably clear that a second fiscal package will not be enacted until after the Obama administration takes office in late January. Other potential measures of support — deployment of TARP funds and more aggressive expansion by the GSEs, for example — likewise await the transfer of power.”

Their estimate for the unemployment rate — reported at 6.5% in October — is now 9% by the end of next year, up from the earlier 8.5% forecast, with continued increases in 2010. “This forecast, if correct, makes the current recession unequivocally the worst single downturn on record since World War II insofar as increases in joblessness are concerned, and it raises the prospect that this recession could eventually exceed the five-point cumulative increase posted during the double-dip recessions of 1980 and 1981-1982 combined,” the Goldman economists say.

They also expect after-tax economic profits of U.S. companies to drop 25% in 2009, rather than the previously expected 20% fall. That would mark the biggest decline since 1938.

Their forecast does not include fiscal stimulus, however, due to uncertainty about the timing and magnitude. They acknowledge “the probability is rising” that the next round of stimulus will exceed the $200 billion they’ve been assuming. But “any significant impact seems unlikely” until the second quarter of 2009 at the earliest.

Inflation is expected to slow sharply as the economy contracts. The consumer price index fell last month and should show a year-over-year decline of 1.4% in third quarter of 2009 due to the reversal of energy and food prices, Goldman’s economists forecast. But they add, “we do not expect a broad-based, sustained pattern of significant price decline that would normally be associated with the term ‘deflation’ over the forecast horizon.” –Sudeep Reddy

A roundup of economic news from around the Web.

Compiled by Phil Izzo

Fannie Mae and Freddie Mac announced today that they are suspending foreclosures from Nov. 26 through Jan. 9 in order to work on its loan modification plan. The following are the full texts of the releases from the companies:

Fannie Mae statement

In order to support the streamlined modification program announced on November 11, 2008, Fannie Mae today issued a notice to its loan servicing organizations and retained foreclosure attorneys directing them to suspend foreclosure sales on occupied single-family properties as well as the completion of evictions from occupied single-family properties scheduled to occur from November 26, 2008 until January 9, 2009.

The temporary suspension of foreclosures is designed to allow affected borrowers facing foreclosure to retain their homes while Fannie Mae works with mortgage servicers to implement the streamlined modification program scheduled to launch December 15. Foreclosure attorneys and loan servicers will be instructed to use the additional time to reach out to borrowers who have defaulted on their loans and continue to pursue workout options. The initiative applies to loans owned or securitized by Fannie Mae.

The streamlined modification program is aimed at the highest risk borrower who has missed three payments or more, owns and occupies the primary residence, and has not filed for bankruptcy. The program creates a fast-track method for getting troubled borrowers into an affordable monthly payment through a mix of reducing the mortgage interest rate, extending the life of the loan or even deferring payments on part of the principal. Servicers have flexibility in the approach, but the objective is to create a more affordable payment for borrowers at risk of foreclosure.

“The streamlined modification program by Fannie Mae, Freddie Mac, Hope Now and 27 mortgage servicers is an important step forward in addressing the systemic issues driving the increase in foreclosures,” said Fannie Mae President and Chief Executive Officer Herb Allison. “Until the streamlined modification program is fully implemented, we felt it was in the best interest of both borrowers and Fannie Mae to take this extra step to ensure that homeowners with the desire and ability to prevent a foreclosure have an opportunity to stay in their homes. We encourage other servicers of non-GSE mortgages to participate in the streamlined modification program to bolster our collective efforts to stem the foreclosure crisis.”

Fannie Mae will be working with foreclosure attorneys and servicers to reach out to the more than 10,000 borrowers the company estimates would be affected during this period. Borrowers who have Fannie Mae loans that are scheduled for foreclosure between November 26, 2008 and January 9, 2009, will be contacted directly by the attorney handling the foreclosure. If the home is occupied, Fannie Mae has instructed servicers and attorneys to suspend the foreclosure.

Min Zeng reports from Washington on the G20 Summit.

Chinese President Hu Jintao urged the international community to guard against erecting protectionist barriers to trade and investment.

In a speech Saturday to the first-ever summit of the Group of 20 industrial and emerging nations, the commander-in-chief of the world’s fourth-largest economy said efforts should be made to promote the Doha Round of trade talks and achieve positive developments soon.

The global trade talks were stalled earlier this year partly due to disagreements between the U.S. and India over farm subsidies. The European Union has also imposed anti-dumping duties on Chinese candles, effective Saturday for six months, after European candle makers complained about losing business to cheaper products from China.

China’s call against trade protectionism has been shared by other leaders, including U.S. President George W. Bush. Concern has been rising that the biggest financial crisis since the Great Depression has weakened global growth, which in turn, may prompt calls for greater barriers against global trade.

Text of President George W. Bush’s remarks Saturday after meeting with world leaders about the economic crisis, as provided by the White House:

Welcome. Good afternoon. We just had a very productive summit meeting. Thinking about three weeks ago, when I was talking to President Sarkozy and Barroso at Camp David — some of you were there — I don’t think we could have predicted then how productive and how successful this meeting would have been.

The first decision I had to make was who was coming to the meeting. And obviously I decided that we ought to have the G20 nations, as opposed to the G8 or the G13. But once you make the decision to have the G20, then the fundamental question is, with that many nations, from six different continents, who all represent different stages of economic development — would it be possible to reach agreements, and not only agreements, would it be possible to reach agreements that were substantive? And I’m pleased to report the answer to that question was, absolutely.

The White House released a fact sheet of the G-20 summit. The full text follows:

Summit On Financial Markets And The World Economy

President Bush And World Leaders Agree On The Washington Declaration to Address Current Financial Crisis

Today, President Bush and world leaders gathered for the first in a series of meetings to discuss efforts to strengthen economic growth, deal with the financial crisis, and to lay the foundation for reform to help to ensure that a similar crisis does not happen again. Since the outbreak of this crisis, the world’s leading nations have coordinated actions more closely than ever before. Thanks in large part to these decisive measures, once frozen global credit markets are beginning to thaw and businesses around the world are gaining access to essential short-term financing. This problem did not develop overnight, and it will not be solved overnight. No single nation will be able to fix this crisis, but with continued cooperation and determination, it will be solved as long as we are steadfast in our commitment to reforming our financial sectors and maintaining free and open markets.

Today’s Summit achieved five key objectives. The leaders:

The leaders agreed that immediate steps could be taken or considered to restore growth and support emerging market economies by:

The Leaders Agreed On Common Principles To Guide Financial Market Reform:

Strengthening transparency and accountability by enhancing required disclosure on complex financial products; ensuring complete and accurate disclosure by firms of their financial condition; and aligning incentives to avoid excessive risk-taking.

Enhancing sound regulation by ensuring strong oversight of credit rating agencies; prudent risk management; and oversight or regulation of all financial markets, products, and participants as appropriate to their circumstances.

Promoting integrity in financial markets by preventing market manipulation and fraud, helping avoid conflicts of interest, and protecting against use of the financial system to support terrorism, drug trafficking, or other illegal activities.

Reinforcing international cooperation by making national laws and regulations more consistent and encouraging regulators to enhance their coordination and cooperation across all segments of financial markets.

Reforming international financial institutions (IFIs) by modernizing their governance and membership so that emerging market economies and developing countries have greater voice and representation, by working together to better identify vulnerabilities and anticipate stresses, and by acting swiftly to play a key role in crisis response.

Our Nations Will Continue To Take The Right Steps To Get Through This Crisis

The leaders approved an Action Plan that sets forth a comprehensive work plan to implement these principles, and asked finance ministers to work to ensure that the Action Plan is fully and vigorously implemented. The Plan includes immediate actions to:

The leaders instructed finance ministers to make specific recommendations in the following areas:

The leaders agreed that needed reforms will be successful only if they are grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively-regulated financial systems. The leaders further agreed to:

Another day, another indication of a dire holiday season for retailers.

The Commerce Department reported today that retail sales tumbled 2.8% in October, the sharpest decline on record. Although the bulk of the drop came from lower gas and car sales, broad weakness was reported. Clothing sales fell 1.4% from the previous month, while sales of sporting goods were off by 1.6%. Furniture and electronics sales lost 2.5% and 2.3% m/m respectively

Window shopping may be more popular than regular shopping this year. (Getty Images)

“The weak October sales also foreshadow a miserly holiday shopping season for most retailers,” said Robert Dye an economist as PNC. “Wal-Mart and other bargain stores may gain market share as shoppers avoid higher-end department stores, but most retailers will feel the bite of weaker consumer spending.”

This morning J.C. Penney said its profit slid 52% on falling sales and the department-store chain projected results for the holiday period well below analysts’ expectations. Meanwhile, Nordstrom lowered its business forecasts yesterday.

David Resler, an economist at Nomura Securities, notes that consumers have delayed their holiday shopping in recent years, increasingly waiting for the steepest price cuts. “With some large retailers already starting holiday promotions well ahead of usual, the waiting game this year could be especially severe,” he said.

Resler notes that one of the factors in the timing shift has been a wider use of gift cards. But shoppers might be more reluctant to give gift cards this year. Dye notes, “A consequence of the weak holiday shopping season may well be an increase in bankruptcies by retailers after the first of the year.”

A gift card for a retailer which goes out of business before the card can be redeemed is a pretty crummy gift. Just ask anyone who got a Sharper Image card last year.

Economists and others weigh in on the decline in October retail sales.