The Fed on Tuesday introduced another set of emergency lending measures totaling $800 billion, hard on the heels of the Citigroup rescue.

There are two parts.

(a) A new mortgage program, under which the Fed may buy up to $100 billion of debt issued by the government-sponsored mortgage enterprises or GSEs (Fannie Mae, Freddie Mac and the Federal Home Loan Banks).

(b) It will also buy up to $500 billion of RMBS (residential mortgage backed securities) guaranteed by the GSEs.

In a separate measure aimed at addressing the lack of liquidity in consumer lending, the Fed launched a $200 billion facility under the TALF (Term Auction Lending Facility) to support consumer finance, including securitized loan pools of student, auto, and credit card loans and loans for samll- and medium-sized (SMEs) backed by the US Small Business Administration.

The first $20 billion of losses on the above will be funded from the TARP, thus allowing the US central bank to preserve the integrity of its balance sheet, with the "fiscal" costs of the program down to the US Treasury.

The Fed's latest support facilities are intended to (a) help ease some of the growing consumer credit strains in the US, (b) try to revive the residential mortgage market, where the GSEs in recent months have been the only issuers of new mortgages in size.

Clearly, the Fed's focus here is to help unfreeze the consumer credit markets, which have all but dried up during the latest escalation of the financial crisis.

The US banking system rescue plans launched in October and November are a big step in the right direction with regard to unfreezing markets, though there remains more to do, and the US banking system is still short rather than well-supplied with capital.

US banks still don't have enough capital from the standpoint of future credit losses as the economic recession takes its toll, and the system overall was under-provided during the good years (as measured, for example, by system LLRs versus NPLs).

What the Fed wants to do now above all is to prevent the broader US banking system from undergoing excessive deleveraging through balance sheet shrinkage driven by financial capital shortages or risk aversion.

The US authorities need to spend the rest of the TARP ($350 billion) fairly quickly, as the first tranche has so far failed to achieve its objectives, spreads remain wide and the level of mortgage interest rates is still above where it was a year ago.

The resumption of credit flows to "good" borrowers is essential to containing or offsetting some of the future credit losses due to the economic downturn - that much is certain. Due to ongoing market failure, private financial institutions seem incapable of fulfilling that role. It is vital that the full weight of the US government is directed toward achieving this objective.

The US financial rescue plans laid out so far have been ad hoc and less effective than many had hoped. They cannot guarantee that "protected" banks and OFIs will lend on the scale that is going to be required of them (for example, providing loans to more cyclically-vulnerable borrowers such as SMEs).

More government initiatives may yet be required, possibly even extending to "national service" from the major banks (for example, mandated loan growth targets, as in China). Indeed, this much was implicit in the statement accompanying the measures yesterday, in its reference to a possible extension of Fed buying to private-label RMBS and CMBS (where the downturn in the physical commercial real estate market has yet to get underway).

The author is head of investor communications at JF Asset Management

(HK Edition 11/28/2008 page3)