Finally, the feds may have made a strong move to start thawing the credit markets. The FDIC's TLGP is giving financial institutions the power to raise cash by issuing low-risk debt securities.

According to the eBay pulse, the hottest products available right now are Wiis, iPods, and Xboxs. But if you were to ask an investor what was at the top of her holiday list, she's likely to ask for risk-free securities instead.

Since the first quarter of this year, federal lawmakers have been rolling out a string of financial programs to shock the economy back into normal working order. Americans have seen the launch of mortgage assistance, economic stimulus payments, equity infusions into banks, enhanced FDIC deposit insurance, and now, the FDIC's Temporary Liquidity Guarantee Program (TLGP). While most of these haven't accomplished anything magical, the TLGP may be the initiative that finally starts to unlock both the commercial and consumer credit markets.

Commercial and consumer credit lockup


For a long time, it's been the industry norm for financial institutions to carry significant debt on their balance sheets. That structure works out all right as long as those institutions can secure refinancing for their debt when it matures. Historically, individual and institutional investors have stepped up to help with this refinancing need by purchasing bonds and other securities issued by those financial companies.

Lehman's bankruptcy, however, shattered investor confidence in the financial sector. Bondholders far and wide were left high and dry by the firm's collapse. Even those who weren't exposed to Lehman-issued debt became understandably reluctant to invest in other financial companies.

When financial institutions don't have the resources to refinance their own debt, they also don't have the resources to provide commercial and consumer credit.

FDIC-backed debt serves pent-up demand


The TLGP allows financial companies to issue debt that's backed by the full faith and credit of the U.S. government. The companies that participate have to pay the FDIC for the guarantee. But in return, they receive the ability to raise cash in an affordable way, by offering investors a risk-free debt security with a competitive yield.

Early indications are that the TLGP is encouraging the return of normal, functioning credit markets. Goldman Sachs Group was the first to jump on the program, selling $5 billion worth of notes that will mature in 2012. Morgan Stanley, JPMorgan Chase, Bank of America, GE Capital, Citigroup, and SunTrust have also announced plans to participate. So far, investors have responded enthusiastically-showing a strong demand for safe investments that outperform the currently depressed yields of Treasury securities.

Investors and financial advisors like the FDIC-backed debt as a diversification tool. It's essentially a new, low-risk asset class that should add stability to the investor's portfolio performance.

You can't buy FDIC-backed debt on eBay-but perhaps the debt's popularity will make it easier for you to make other purchases, vis-a-vis a healing of the credit markets that, hopefully, helps stimulate a broader economic recovery.

Published on December 26, 2008