Credit Crunch Pinches Entire Lending System

Undercapitalized banks stand to benefit from $1T infusion
By Kevin Spak,  Newser Staff
Posted Feb 20, 2009 12:35 PM CST

(Newser) – Banks aren’t lending, and to change that the government is propping up not just the banks but also the vast, largely unseen financial system that fuels them, the New York Times reports. Banks rarely keep the loans they make anymore; instead, debt is packaged into securities and sold, generating capital that funds more lending. The market for those securities has collapsed, but the Obama administration has a $1 trillion plan to revive it.

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That money, which will come from the Treasury and Federal Reserve, will provide low-cost loans and guarantees to the hedge funds and private equity firms that buy the securities. But the plan has plenty of critics, who worry that it won’t do enough and complain that it only perpetuates the risk-sharing model that created the mess. “It’s probably a step forward,” said a partner at one investment firm, “but it may only be a baby step.” (Read more mortgage backed securities stories.)

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