US Financial Recovery Plan Passed by Congress
At the start of last week, Troubled Assets Relief Programme (TARP) – the $700bn US recovery plan to buy troubled assets from ailing financial companies – faced opposition and was criticised for being a bail out package for the bankers who caused the crisis at the expense of US taxpayers. Over the week, however, it was recognised that a recovery package to restore confidence and stability in the US markets was vital and the US Congress finally approved TARP on Friday. The Federal Reserve and US Treasury are now under growing pressure to add further measures to stem the ongoing impact of the crisis.
According to news sources, one potential target of intervention is the commercial paper market, which has shrunk substantially in recent weeks. Money market funds (MMFs) could, for example, be allowed to borrow money via banks to fund their holdings of commercial paper. Some experts think the Federal Reserve could start offering term loans on an unsecured basis to regulated banks at a fixed spread over its main interest, therefore capping the interbank lending rate, which has risen dramatically during the crisis. This possibility became more realistic following the passage of TARP, which gave the US Treasury the authority to guarantee the Fed against any losses incurred in such an operation.
Implementation of the $700bn plan will start this week with the US Treasury outlining the guidelines for the selection of private asset managers to run the programme.