Banks, Brokers May Require More Fed Help

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The New York Sun

Washington — The Federal Reserve may have to increase the cash it provides to banks and brokers, already a record, to help them balance their books at the end of the year.

Six bank failures in the past two months and rising concern about Lehman Brothers Holdings Inc.’s capital levels pushed lenders’ borrowing costs to near a four-month high yesterday. They may climb further as companies rush for cash to settle trades and buttress their balance sheets at year-end.

“This could be the mother of year-ends,” the vice president of Macroeconomic Advisers LLC in Washington, who used to serve as head of monetary and financial market analysis at the Fed, Brian Sack, said. “The markets will need extraordinary actions to get through it.”

One option is for banks and brokers to increase the loans they take out directly with the Fed; the central bank reports on the figures yesterday. Officials could also offer options on its biweekly loan auctions or introduce special repurchase agreements to straddle the end of the year, economists said.

Futures traders have also priced in a higher probability of a cut in the benchmark interest rate by at least a quarter-point by year end. Investors now see a 32% chance of a cut in December, up from 14% a week ago. When policy makers sought to head off a potential funding crunch with the year 2000 changeover, they auctioned liquidity options to the primary dealers of U.S. Treasuries.

Lending to commercial banks from the so-called discount window averaged $19 billion in the week through September 3, the fifth record in seven weeks.

Traders in the forward markets, where financial instruments are sold for future delivery, are pricing three-month cash from December to March at 94 basis points over expectations for the federal funds rate. That’s up from 85 basis points at the start of the week and an average of 7 basis points in 2006.

“If banks are unwilling to lend to other banks, then they are unwilling to lend to you and me,” the chief executive officer at Axiom Management Partners LLC, Stan Jonas, said.


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