Treasury wants to jump-start stalled credit card securities
Latest bailout would spur credit card, student loan lending
Stalled credit card asset-backed securities markets may be the next beneficiaries of the $700 billion federal bailout package. U.S. Treasury Secretary Henry Paulson on Wednesday said portions of federal money approved to help Wall Street survive the credit crunch may be used to bolster the asset-backed securities markets.
Credit card securities help fuel credit card lending by allowing issuers to bundle future credit card payments of millions of account holders into bonds that are sold to investors. Issuers use the proceeds of those securities to get capital to fund additional credit card loans. Although many market watchers considered credit card securities the safest and most resilient of all asset-backed securities (ABS), defaults on credit card payments have gone up and the market for these investments ground to a near halt in October as investors shied away from buying ABS bonds. (See How credit card securities work.)
Market plays 'critical role'
"The asset-backed securitization market has played a critical role for many years in lowering the cost and increasing the availability of consumer finance," Paulson said in a statement. "This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy."
This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt.
|-- Henry Paulson
U.S. Treasury Secretary
Paulson's comments were part of an update on the government's financial rescue package -- the Troubled Asset Relief Program (or TARP) approved by Congress and signed by President Bush in October. Paulson's remarks also came on the same day that federal regulators issued a joint statement urging banks -- which have gotten billions of dollars in capital from the federal government in recent weeks -- to make loans to creditworthy borrowers.
Although the $700 billion program was intended for use in buying up troubled mortgage loan assets from banks, Paulson said the Treasury has used it to infuse capital into the nation's top banks and give taxpayers an equity interest in the banks. "I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks," the Treasury chief said.
Paulson said the Treasury and Federal Reserve are exploring options to boost investor confidence in buying securities backed by credit cards and other consumer loans. This includes "the development of a potential liquidity facility for highly rated AAA asset-backed securities. We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market by providing them access to federal financing while protecting the taxpayers' investment," Paulson said.
Eric Higgins, a Kansas State University finance professor and ABS researcher and expert, said Paulson's announcement is "a good sign for the credit card securitization market. What that actually means is kind of up in the air. It could mean guarantees on new issues and purchases. It could be guarantees like they did in money markets to guarantee the funds to keep investors in there."
According to industry reports, nearly $51 billion in ABS deals were conducted in October 2007. That figure dwindled to $500 million during October 2008.
"If we can bring the investors back into the market, that will allow the banks to issue further. If they can issue ABS further, they can issue more loans," Higgins said. He added, " There's still securitizaton happening; it's obviously slowed significantly. It's nothing like what it was. There's not a market for it. People are just not interested in buying any securitized product, whether it's mortgages or anything else."
Higgins cautioned that shoring up the securitization markets as Paulson proposes does not guarantee that consumers will benefit. "Just because you provide capital, it doesn't mean you're going to make loans. It doesn't necessarily get the money in the hands of the people who need it."
Paulson hinted that federal support of the consumer-related securities markets may also be used to help securities backed by mortgages and commercial loans. He added: "Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy."
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See related: Rising defaults and job losses vex credit card securities, How credit card securities work, Will credit card securities be the next financial mess?, Fed report: Banks tighten lending standards even more
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