TALF Revamp Could Pose New Fed Risks

By Steven Sloan


With the Federal Reserve Board poised to expand its consumer lending program to accept many of the bad assets held by financial institutions as collateral, the central bank is crossing into a new — and risky — era. Since the onset of the financial crisis, the Fed generally has been reluctant to accept big risks. Though it took on some of the worst holdings from Bear Stearns Cos. and American International Group Inc., its other liquidity programs accepted only highly rated securities as collateral. That changed Monday when the Treasury Department said the Fed would accept the toxic assets on bank balance sheets as collateral for loans under the Term Asset-Backed Securities Loan Facility. The shift could spell more risk for the Fed while further stripping it of the political independence that has made it a Washington powerhouse. “There are huge amounts” of securities that have been downgraded since origination, said Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc. “Many of them are junk or below now.”