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Meet the TSLF

In the latest move to combat the financial firestorm in the nation's credit markets, the Federal Reserve announced today an expansion of its ability to push cash and liquidity out into non-bank financial markets.

The Term Securities Lending Facility (TSLF) -- a sister to the successful Term Auction Facility (TAF) for banks -- will allow non-bank primary securities dealers to pledge certain hard-to-value or trade debts as collateral for rock-solid Treasury Securities for a period of up to 28 days. (See the Fed's TSLF press release here.)

What does the TSLF do?

It allows non-bank securities dealers to turn a non-liquid instrument (MBS) into a liquid one (Treasury). These investments, in turn:

  • will have known, stable value - which can shore up sagging loan books;
  • are as good as cash, and/or can be sold/swapped etc. to raise cash;
  • have a 28-day shelf life (rather than just overnight).

Securities dealers are having a difficult time in selling their debt instruments, which in turn limits the amount of money that is put back into the banking system. This offers securities dealers a way to get hard-to-sell paper off their books, even temporarily, in order to raise funds. This allows them to continue operations without needing to resort to a "fire sale" of untradeable mortgage assets (at losses) to raise cash.

This new facility expands the lending process to include private-label MBS, such as those which may have been produced by a financial conduit other than Fannie Mae or Freddie Mac, such as a Merrill Lynch. These private-label MBS have become nearly impossible to trade in recent months, and lately can only be sold at steep discounts to a market which really doesn't want them.

In these kinds of repurchase agreements, or repos, the Fed buys U.S. Treasury, mortgage-backed and so-called agency debt (Fannie Mae, Freddie Mac, and Ginnie Mae MBS) from primary dealers for a set period, temporarily raising the amount of money available in the banking system. At maturity, the securities are returned to the dealers, and the cash goes to the Fed.

If successful, this could also set the stage for similar programs for other kinds of asset-backed securities (i.e. auto loans, commercial mortgages, credit card receivables) should those markets become more profoundly affected by the expanding credit crunch.

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