The TALF would provide loans to investors and agree to take illiquid debt as collateral

TO BE NOTED: From Bloomberg:

"U.S. Considers Expanding TALF to Distressed Assets (Update2)

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By Robert Schmidt and Rebecca Christie

March 18 (Bloomberg) -- The Obama administration is considering using a new Federal Reserve program designed to spur consumer lending to help remove distressed assets from banks’ balance sheets, according to people familiar with the matter.

Officials may meld the Treasury’s plan to set up private investment funds to buy frozen assets with the Fed program, known as the Term Asset-Backed Securities Loan Facility, the people said. The Federal Deposit Insurance Corp. may also get a wider role, the people said.

Treasury Secretary Timothy Geithner may use an array of approaches to maximize the likelihood of cleansing banks’ balance sheets so they can start lending again. The next announcement, which may come as soon as this week, will be critical after Geithner’s first unveiling of the strategy caused a sell-off in financial stocks.

“The markets are just getting increasingly nervous, the longer they wait to announce the plan,” said Stephen Myrow, a former Treasury official in the Bush administration who helped create the TALF.

The TALF would provide loans to investors and agree to take illiquid debt as collateral, the people said. It would be used alongside the Treasury’s planned public-private investment funds.

Current TALF

As it’s currently set up, the TALF may lend as much as $1 trillion to investors from hedge funds to pension funds and insurance companies to buy recently created securities backed by loans for car purchases, college education and real estate. Applications for its first loans are due tomorrow.

Broadening the TALF to include older, illiquid and lower- rated securities could allow the participants in the public- private investment funds to potentially repackage assets and sell them on to a wider group.

The TALF is supported with money from the $700 billion bank- rescue fund passed by Congress in October. The Bush administration originally set aside $20 billion to seed $200 billion in loans; Geithner has proposed raising the government contribution to $100 billion. The facility could need additional money to address so-called legacy assets.

The Fed’s policy-making committee, which met today in Washington, said in its statement that the range of eligible collateral for the TALF “is likely to be expanded to include other financial assets.” The Federal Open Market Committee also announced about $1.1 trillion of extra measures to revive financial markets, including purchases of long-term Treasuries.

FDIC’s Role

The FDIC’s role may also expand to help finance the administration’s initiative, and perhaps to run an aggregator- type unit that would purchase whole loans -- those not packaged into other securities -- three people said. FDIC officials have extensive experience dealing with nonperforming loans from their role in taking over failed banks.

Treasury spokesman Isaac Baker, Fed spokeswoman Michelle Smith and Andrew Gray at the FDIC declined to comment.

The rollout of details on the toxic-asset plan could slip into next week as the Treasury grapples with a growing furor over bonuses awarded by insurer American International Group Inc. AIG has been given more than $170 billion in government aid.

President Barack Obama has ordered Geithner to “pursue every legal avenue” to recoup money distributed to employees in an AIG unit that sold credit-default swaps and whose bad bets helped touch off the financial crisis.

Geithner told reporters after meeting with international counterparts outside London last week that his plan was likely to emerge “in coming days.” Details of the strategy could still change.

Geithner’s Speech

The Treasury secretary disappointed markets and lawmakers when he didn’t provide many specifics about the distressed asset clean-up in his Feb. 10 unveiling of the administration’s approach.

Dealing with the illiquid securities also bedeviled former Treasury chief Henry Paulson, who ultimately decided to scrap his plans and instead spent almost half the bank-rescue funds injecting capital into financial institutions.

To expand the program, the Treasury will need the agreement of the Fed.

Opening the TALF to legacy assets “is the most effective and efficient way to purge troubled assets from the financial system while maximizing taxpayer protection,” Myrow said. To guard against losses the Fed would take so-called haircuts, or discounts on the loans, for the collateral it accepts.

The FDIC option, pushed by Chairman Sheila Bair, could be known as the Asset Disposition Facility, the people familiar with the matter said. Under one scenario being discussed, the FDIC may attach a government guarantee to the assets and then sell them to investors.

‘Big Numbers’

It’s not clear when Obama will need to ask Congress for more money to continue to fund the bank-rescue program. Most of the $700 billion has already been allocated to existing programs.

“We’re talking about big numbers here,” said Kevin Petrasic, a former official at the Office of Thrift Supervision, who is now a lawyer at the Paul, Hastings, Janofsky & Walker law firm in Washington, adding that Congress is still “smarting” from having to dole out $700 billion for saving Wall Street.

“This is a difficult market right now, and there are lots and lots of challenges as far as Treasury and the Fed are concerned,” he said. “The margin for error is very slim.”