Late in the day Wednesday, the Federal Reserve announced a $1 trillion plan to help with banking liquidity. Should we say “another” $1 trillion plan? Is anyone keeping track anymore?

Here’s how it breaks down.

The Treasury’s plan would set up private investment funds to buy frozen assets with the Fed program, known as the Term Asset-Backed Securities Loan Facility (TALF).

What are frozen assets? As of now, they include “newly issued, top-rated securities backed by a variety of loans including student, small business, auto and credit card loans.”

When the crisis hit, this type of credit dried up, and banks have been extremely reluctant to start lending again. The government hopes that by offering backed securities, banks will feel more comfortable and start opening the taps to qualified consumers.

And here’s where things get interesting.

TALF had been stalled for several months, and now that the ball is rolling again, older financial assets want to be considered for this program…

Bloomberg reports, “Broadening the TALF to include older, illiquid and lower-rated securities could allow the participants in the public-private investment funds to potentially repackage assets and sell them on to a wider group.”

This might be the fastest way for institutions to clean out their books, but there’s a lot of uncertainty as to the true value of these assets.

And if other financial assets are to be included in the TALF program, like corporate debt and mortgages not guaranteed by Fannie Mae and Freddie Mac, or other toxic bank assets, the Fed risks paying a stiff premium.

Regardless of how well this program might work, markets are nervous. There are too many moving parts and not enough definition. What’s included, what’s not?

We had the same problems when Hank Paulson took the reigns of the original bank bailout plan last year, and didn’t tell anyone where the money was being spent.

Now we’re talking about an additional $1 trillion – on top of the recently passed stimulus package, and on top of the $300 billion Treasury bond purchase announced yesterday. There’s no investor not shaking his or her head at the enormity of these plans.

And there’s no guarantee that this will even work.

Justice Litle, editor of Macro Trader, says, “I wrote about this possibility a while back, but the Fed had hemmed and hawed so long I didn't think they were going to do it. There was further talk that they might support the middle end of the curve, but not the long end.”

That means gold is back in play. “This surprise action changes the situation significantly,” he says. “This is also a strong surprise development for gold and gold stocks.”

Other Related Topics: Federal Reserve , Government Issues , Sara Nunnally , Taipan Insider

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