Today the Federal Reserve announced the creation of a new special purpose entity that will buy consumer and business debt. Under the new plan, the Treasury will provide $20 billion dollars in of credit protection (from the Troubled Asset Relief Program) — and will absorb most of the losses, should they occur.

The Federal Reserve will provide the money used to purchase the assets. The Fed says (PDF) that the loans in the asset backed securities must be “auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration,” though the program may be expanded to include “commercial mortgage-backed securities, non-Agency residential mortgage backed securities, or other asset classes.”

The New York Times explains:

The new fund would, in effect, close the circle in the chaotic evolution of the Treasury rescue effort, officially known as the Troubled Asset Relief Program, or TARP. Under the new version, the government would once again plan to buy assets, including some troubled ones. The Fed would provide most of the money and buy comparatively healthy debt, like bundles of car loans, that private investors have stopped buying in recent weeks.

The Fed further announced that it would purchase up to $100 billion dollars of mortgage-backed securities backed by GSEs (Fannie and Freddie, etc.) The Wall Street Journal says that the stock market is pleased as can be about this new development. Stocks are up again this morning after soaring 12% in two days — the largest jump in stock prices since the crash of 1987.

The Dow Jones Industrial Average was recently up 62 points, or 0.7%, trading at 8505.11. The blue-chip measure is off to a promising start as it attempts to extend a two-day winning streak in which it has soared 12%, the biggest gain since the two days following the 1987 market crash.

U.S. Unveils $800 Billion Credit Program [NYT]
Term Asset-Backed Securities Loan Facility (TALF) Terms and Conditions1 (PDF) [Federal Reserve]
Stocks Continue Rise as Fed Unveils New Program [WSJ]
(Photo: afagen )

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