The two Democrats both said the decision will spur liquidity in the $400 billion student-loan market, which has been roiled by the credit turmoil that began with subprime mortgages. Bernanke previously told Kanjorski that lending directly to student finance companies would set a bad precedent. Dodd's office yesterday released an April 25 letter from Bernanke saying it was up to Congress and the Bush administration to address diminishing profits on student loans.
SLM Corp., Citigroup Inc.'s Student Loan Corp. and about 50 other lenders have stopped writing some forms of the loans in recent months, citing increased borrowing costs and cuts in government subsidies.
``I commend Chairman Bernanke for reevaluating his position,'' Kanjorski, a Pennsylvania Democrat, said in a statement. He and 31 other members of Congress in March asked the Fed to let investment banks pledge securities backed by student debt as collateral for loans from the central bank. The group also requested the Fed lend directly to student-loan companies.
Balance-Sheet Muscle
Dodd, a Connecticut Democrat, and six other Democratic senators wrote Bernanke on April 17 to urge him to use the Fed's balance sheet to repair the student loan market.
Today, the Fed said it expanded the collateral accepted under the Term Securities Lending Facility to include AAA rated asset-backed investments, which would include student loans bundled into bonds. The program includes lending up to $200 billion of Treasuries to the 20 primary dealers in U.S. government debt. The TSLF began in March.
The decision means the Fed is increasingly using its balance sheet to affect prices of securities dealers have trouble financing, Fed watchers said.
`Safe Harbor'
``They want to put a floor'' under some prices, said Vincent Reinhart, the Fed Board's former Division of Monetary Affairs director. ``They are carving out this special place, this safe harbor.''
About 95 percent of outstanding student-loan securities are AAA rated, according to the American Securitization Forum, an industry group. The Federal Open Market Committee approved the change at its April 29-30 meeting.
Bernanke rebuffed Kanjorski's direct loan request in a March 31 letter, stating that ``the extension of such credit to one sector invites credit requests from others.''
Policy makers were already studying other options for the TSLF before the Dodd and Kanjorski letters, a Fed official said on condition of anonymity. The fact that the lawmakers had made the requests posed a challenge because it raised the issue of political influence, the person said.
By expanding the TSLF to include asset-backed securities, the Fed will be using its balance sheet to support billions of dollars in consumer finance. The market includes debt backed by credit card, auto loan and other payments. Merrill Lynch & Co.'s asset-backed fixed and floating rate index represents securities with $1.04 trillion face amount.
Mortgages Accepted
The central bank already accepts residential and commercial mortgage-backed securities and agency collateralized mortgage obligations through the TSLF.
``The wider pool of collateral should promote improved financing conditions in a broader range of financial markets,'' the Fed said in a statement, without mentioning student loans.
Today's action was part of a broader stab at easing persistent strains in financial markets. The Fed boosted its biweekly Term Auction Facility sales of cash to banks by 50 percent to $75 billion. It also raised the amount of dollars it makes available to the European Central Bank and Swiss National Bank through swap lines to a combined $62 billion from $36 billion.
