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The Difference Between TARP and TALF

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Includes: AIG, C, DIA, FMCC, FNMA, GS, JPM, MS, QQQ, SPY, XLF
by: T.S Donnely

This past Tuesday, Treasury Secretary Henry Paulson introduced a new resolution to the current financial turmoil that is rocking our world's economic stability.

After the Federal Reserve first handed a $700 billion bailout plan to Congress in September to take toxic mortgage-backed securities off of balance sheets of banks - also known as the wall street bailout or the Troubled Asset Relief Fund (TARP) - was abandoned within a month of deploying. Ergo, the second bailout plan - Term Asset-Backed Securities Loan Facility (TALF) with an $800 billion implication.

So now we have TARP (bailout #1) and TALF (bailout #2), which after you get passed the overrated vernacular, the important questions remain - how'd we get from bailout #1 to bailout #2 and what is the difference between the two.

Paulson, who made the announcement earlier this month to change bailout #1 from its original buy-out plan, said they would basically now only invest in financial firms who need help by buying their stocks to encourage banks to unclench their lending hands, completely scratching out the original feature of buying up banks' troubled assets. Paulson went on and said doing this now would "not be the most effective way" to handle our financial problems.

Because the plan has averted and is definitively unknown, that doesn't mean the tax-paid bailout dollars dissipates or will be unused. The Treasury is projected to inject $250 billion into financial firms to help with liquidity and President Bush requested an additional $100 billion to save the floundering insurance group AIG and more recently, Citigroup (NYSE:C). Since the idea of buying mortgage-backed securities from financial firms like JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) has been nixed, the remaining $350 billion will likely be left for the next administration to allocate.

Bailout #2, which consequently will not be tapped from our pockets rather from printing of more money, is known by some as the consumer bailout, and also a refocused plan to more-so help financial markets dealing with consumer asset-backed securities like auto loans, credit-card debt, and student loans. The new consumer program will allocate $200 billion by the Federal Reserve to security holders of consumer backed debt, essentially doing this will insure the debt if a borrower defaults. And backing the backers, the Treasury department will provide $20 billion from the $700 billion from bailout #1 funds to safeguard losses the Federal Reserve will incur.

Additionally, the Federal Reserve announced that they will also be buying up $600 billion in debt and mortgage-backed securities from Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae, the three government-sponsored finance firms established to promote home ownership. This enactment is aimed towards getting credit circulating to worthy home-buyers looking to purchase a new home, which will help rehabilitate the distressed housing market.

Paulson, at the press conference Tuesday, said this new endeavor of boosting consumer lending (after it had essentially dried up in October) and also making affordable housing-finance more available, was crucial to stabilizing the economy.