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WASHINGTON, DC-Five days from now, on Jan.7, the House Financial Services Committee will be holding a full hearing on the priorities for TARP, or the Troubled Assets Relief Program, in the Obama Administration.

Little of the agenda has been released yet, but it is easy to guess at the framework and general themes of the conversation. Simply put, Congress has not been pleased with the way Treasury has spent the first $350 billion tranche allotted under the Emergency Economic Stabilization Act, which established TARP in the Fall. The reasons range from the inconsistent and shifting mission of the program, to subverting the free market process with the bailout of the auto industry, to too little emphasis on assisting individuals facing foreclosure. Indeed, several Congresspeople have vowed not to approve the next tranche unless there is some element of foreclosure relief in it.

What is clear is that the premise behind the major initiative that fell under the first tranch of funds–the $250 billion capital injection into the banking system–did not fully meet expectations. The partial privatization of these banks did appear to prevent a systematic breakdown in the global financial network–but it didn’t jumpstart lending as Treasury Secretary Henry Paulson said he hoped it would.

The next iteration of TARP is likely to include another stab at the seemingly intractable commercial credit logjam. “I don’t think it is a matter of Congress not understanding what the issues are–it is more a problem of how it looks politically,” a representative for a commercial real estate association tells GlobeSt.com.

Indeed, the CRE industry has been working overtime to develop proposals that might unlock credit markets. Some of these have been floated publicly, such as the suggestion to establish a credit facility for healthy commercial real estate loans. Another example is Federal Housing Finance Agency director James Lockhart, who recently told CNBC that he anticipates more “creativity” in TARP, such as the purchases of private label and other weaker mortgage assets.

This, of course, is a variation on TARP’s original purpose–to buy up the illiquid debt that is moldering on many lenders’ balance sheets. Treasury said it was abandoning this plan in November when it announced it would be making consumer lending its primary focus.

But while Treasury may have tabled this concept for TARP, the Federal government, in fact, has already implemented a form of this idea on a limited basis. Details about a particularly aggressive move by the Federal Reserve Bank to buy up AIG RMBS assets have started to leak out over the last few weeks, both in government documents and in press reports. The real estate industry, the association source tells GlobeSt.com, is hoping to see elements of this transaction repeated in additional relief measures, either by Congress or the Federal Reserve Bank.

Shortly before the holiday season got underway the New York Federal Reserve released a short statement providing some details of a loan it made to its limited liability company to purchase AIG RMBS.

Specifically, on Nov. 10, the Federal Reserve Bank of New York lent up to $22.5 billion to a newly formed Delaware-based LLC to fund the purchase of assets from the securities lending portfolio of several US insurance subsidiaries of AIG. This LLC tapped the facility in mid-December for $19.8 billion to purchase RMBS assets from participating domestic AIG insurance company subsidiaries with an estimated fair market value of $20.8 billion.

AIG, to paraphrase federal officials, was too large to let fail. It may be that exceptions for this insurance giant will continue to be made–that is, it may not opt to buy other assets. But AIG, it is equally clear, will continue to push the envelop in what it can get from the federal government. And as these details become public, it will be harder for the government to turn down other players in the industry.

For instance, before the New Year’s Eve holiday, the Wall Street Journal reported that AIG was seeking permission to change some of the terms of its $60-billion government loan. It reportedly wants the Federal Reserve to raise the threshold of non-cash assets it can submit as payment for the loan above that allowed under the loan agreement, thus allowing it to accept a higher proportion of stock and other forms of non-cash consideration for its assets.

Meanwhile the Federal Reserve is gearing up to launch another aggressive financial maneuver: it will begin buying up $500 billion in mortgage-backed securities sometime this month. The Federal Reserve has already purchased some $15 billion of direct GSE debt. That, along with Treasury’s purchases of MBS has helped to dramatically drive down mortgage rates.

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