What's with the Fed's Securities Lending Program?

Very early this morning the Fed's announced they are increasing their Securities Lending Program by $200 billion.  Before the market opened, all financial stocks were up dramatically.

"So what is this Securities Lending Program and why should I care?"

Good question.  The buzzword you are going to hear is liquidity. 

In this we are talking specifically about the ability of big lenders to borrow money from somewhere (as in the secondary mortgage market), and lend money to somewhere (that would be you and me - the homeowner)

The Fed deals in Treasury dollars.  The Lenders deal in Mortgage Backed Securities (MBS).  Remember that lenders sell pools of mortgages to investors packaged as Mortgage Backed Securities.  The prices investors pay for those pools determines what that lender can do or not do in the future.  If the investor dollars have stopped buying what your selling you might have an issue. 

I grow tomatoes in the summertime.  I love Heirloom Tomatoes and they dominate my garden every year.  Let's assume times are tough in the mortgage business.  Yeah right!

I decide to go into the tomato business.  I box all my tomatoes as they ripen and sell them to the local grocery store down the street.  The prices that the grocer will pay me fluctuate due to the demand, but overall I should make a pretty good return. 

It's the heat of summer, and I walk in with my prized Purple Cherokee's, Black Crims, and Green Zebras.  Sam, the grocer says he isn't buying, neither is Joe down the street, or Luigi across town!  They tell me that some FDA report came out saying tomatoes might cause excessive eyebrow hair growth.

Oh no!  What am I going to do with all these tomatoes?  My garden is wall to wall tomatoes!How am I going to pay my water bill if I don't get cash for all these damn tomatoes?

I have a liquidity problem.  That's where Lenders are right now.

The Securities Lending Program allows "primary dealers" (big lenders) to exchange mortgage-backed securities (MBS), and other debt instruments for Treasury securities. 

Going back to my tomatoes.  Although the market for my tomatoes has dried up today, we all know it'll come back someday in the future (we hope).  The Feds have a program that allows big Tomato Dealers like me, who's market has dried up, to trade in some of those bushels in exchange for something else (let's say, apples). 

Now follow along, we're going to move quickly here...

Luckily the water company accepts apples as payment.  I exchange some of my boxes of tomatoes for apples.  I then pay the water company and keep the water flowing to my garden.  My existing tomato plants don't shrivel up and die.  The news comes out that the FDA story was incorrect and heirloom tomatoes actually increase a certain part of the male anatomy.  Suddenly Sam, Joe, and Luigi are all calling me for my Tomatoes!  That's what the feds hope will happen with the mortgage market.

Wow!

(all puns intended)