Federal Reserve responses to the subprime crisis

The Fed and other central banks have conducted open market operations to ensure member banks have access to funds (i.e., liquidity). These are effectively short-term loans to member banks collateralized by government securities. Central banks have also lowered the interest rates charged to member banks (called the discount rate in the U.S.) for short-term loans.[11] Both measures effectively lubricate the financial system, in two key ways. First, they help provide access to funds for those entities with illiquid mortgage-backed securities. This helps these entities avoid selling the MBS at a steep loss. Second, the available funds stimulate the commercial paper market and general economic activity. Specific responses by central banks are included in the subprime crisis impact timeline.

In November 2008, the Fed announced a $600 billion (~$752 billion in 2021) program to purchase the MBS of the GSE, to help lower mortgage rates.[12]

The Fed is using the Term Auction Facility to provide short-term loans (liquidity) to banks. The Fed increased the monthly amount of these auctions to $100 billion during March 2008, up from $60 billion in prior months. In addition, term repurchase agreements expected to cumulate to $100 billion were announced, which enhance the ability of financial institutions to sell mortgage-backed and other debt. The Fed indicated that both the TAF and repurchase agreement amounts will continue and be increased as necessary.[13] During March 2008, the Fed also expanded the types of institutions to which it lends money and the types of collateral it accepts for loans.[14]

Dollar Swap Lines exchanged dollars with foreign central banks for foreign currency to help address disruptions in dollar funding markets abroad.[2]

The Term Securities Lending Facility auctioned loans of U.S. Treasury securities to primary dealers against eligible collateral.[2]

Concurrent to the collapse of Bear Stearns, the Fed announced the creation of a new lending facility, the Primary Dealer Credit Facility.[15] The PDCF provided overnight cash loans to primary dealers against eligible collateral.[2]

The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility provided loans to depository institutions and their affiliates to finance purchases of eligible asset-backed commercial paper from money market mutual funds.[2]

On October 7, 2008, the Federal Reserve further expanded the collateral it will loan against, to include commercial paper. The action made the Fed a crucial source of credit for non-financial businesses in addition to commercial banks and investment firms. Fed officials said they'll buy as much of the debt as necessary to get the market functioning again. They refused to say how much that might be, but they noted that around $1.3 trillion worth of commercial paper would qualify. There was $1.61 (~$2.00 in 2021) trillion in outstanding commercial paper, seasonally adjusted, on the market as of October 1, 2008, according to the most recent data from the Fed. That was down from $1.70 trillion in the previous week. Since the summer of 2007, the market has shrunk from more than $2.2 trillion.[16]

The Commercial Paper Funding Facility provided loans to a special purpose vehicle to finance purchases of new issues of asset-backed commercial paper and unsecured commercial paper from eligible issuers.[2]

The Term Asset-Backed Securities Loan Facility provided loans to eligible investors to finance purchases of eligible asset-backed securities.[2]

In November 2008, the Fed announced the $200 billion TALF. This program supported the issuance of asset-backed securities (ABS) collateralized by loans related to autos, credit cards, education, and small businesses. This step was taken to offset liquidity concerns.[17]

In March 2009, the Fed announced that it was expanding the scope of the TALF program to allow loans against additional types of collateral.[18]

In March 2008, the Fed provided funds and guarantees to enable bank J.P. Morgan Chase to purchase Bear Stearns, a large financial institution with substantial mortgage-backed securities (MBS) investments that had recently plunged in value. This action was taken in part to avoid a potential fire sale of nearly U.S. $210 billion of Bear Stearns' MBS and other assets, which could have caused further devaluation in similar securities across the banking system.[19][20] In addition, Bear had taken on a significant role in the financial system via credit derivatives, essentially insuring against (or speculating regarding) mortgage and other debt defaults. The risk to its ability to perform its role as a counterparty in these derivative arrangements was another major threat to the banking system.[21]

Programs included a Bridge Loan, an overnight loan provided to JPMC subsidiary, with which this subsidiary made a direct loan to Bear Stearns Companies, Inc, and Maiden Lane (I), a special purpose vehicle created to purchase approximately $30 billion of Bear Stearns's mortgage-related assets.[2]

The Federal Reserve created five programs to give assistance to AIG:[2]

1. Revolving Credit Facility, a revolving loan for the general corporate purposes of AIG and its subsidiaries, and to pay obligations as they came due.
2. Securities Borrowing Facility, which provided collateralized cash loans to reduce pressure on AIG to liquidate residential mortgage-backed securities (RMBS) in its securities lending portfolio.
3. Maiden Lane II, a special purpose vehicle created to purchase RMBS from securities lending portfolios of AIG subsidiaries.
4. Maiden Lane III, a special purpose vehicle created to purchase collateralized debt obligations on which AIG Financial Products had written credit default swaps.
5. Life Insurance Securitization, which was authorized to provide credit to AIG that would be repaid with cash flows from its life insurance businesses. It was never used.

The Federal Reserve provided loans to broker-dealer affiliates of four primary dealers on terms similar to those for PDCF.[2]

The Citigroup Inc. lending commitment was a commitment to provide non-recourse loan to Citigroup against ringfence assets if losses on asset pool reached $56.2 billion.[2]

The Bank of America Corporation lending commitment was a commitment to provide non-recourse loan facility to Bank of America if losses on ring fence assets exceeded $18 billion (agreement never finalized).[2]