Banks, Wall Street Firms Borrow More from Fed

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The New York Sun

WASHINGTON — Banks and Wall Street firms ramped up borrowing from the Federal Reserve’s emergency lending facility over the past week, a fresh sign of the credit stresses plaguing the country.

A Fed report released today says commercial banks averaged $21.6 billion in daily borrowing over the past week. That compared with a daily average of $19.8 billion in the previous week.

For the week ending yesterday, Wall Street firms drew such loans averaging $20.3 billion. That step-up comes after six straight weeks where they didn’t draw any loans.

On Wednesday alone Wall Street firms borrowed a record $59.8 billion. Banks borrowed $33.4 billion that day, the most since right after the Sept. 11, 2001 terror attacks.

The report also showed that the Fed loaned $28 billion to insurance giant American International Group Inc. yesterday. That cash infusion came one day after the government said it would provide a two-year, $85 billion emergency loan to the faltering company. In return, the government has the right to take control of AIG.

The figures were released as the Fed chairman, Ben Bernanke, battles the worst financial crisis in decades. In the last few days, the American financial system has been shaken to its core as bad bets on dodgy mortgage-backed securities claimed more Wall Street giants.

Scrambling to break the grip of a worsening global credit crisis, the Fed and foreign central banks stepped up action Thursday by pumping as much as $180 billion in money markets overseas. At home, the New York Fed acted to ease a spike in overnight lending rates by injecting $105 billion into America’s banking system.

President Bush canceled an out-of-town trip today to stay in Washington and meet with his top economic advisers.

Mr. Bush held a 40-minute meeting with Mr. Bernanke, Treasury Secretary Paulson, and the Securities and Exchange Commission chief, Christopher Cox, along with White House and Treasury Department aides.

Investment houses in March were given similar, emergency-loan privileges as commercial banks after a run on Bear Stearns pushed what was the nation’s fifth-largest investment bank to the brink of bankruptcy. The situation raised fears that other Wall Street firms might be in jeopardy.

Bear Stearns was eventually taken over by JPMorgan Chase & Co. in a deal that involved the Fed’s financial backing.

The identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay 2.25% in interest for the loans.

In the broadest use of the central bank’s lending power since the 1930s, the Fed in March scrambled to avert a market meltdown by giving investment houses a place to go for emergency overnight loans. The Fed has since extended those loan privileges into next year.

The Fed’s expanded lending programs, its involvement in the Bear Stearns rescue and the government’s bailout of mortgage finance giants Fannie Mae and Freddie Mac have spurred concerns that taxpayers could be on the hook for billion of dollars, and that the actions encourage “moral hazard,” where companies take on extra risks because they believe the government will come to their aid.

Separately, as part of efforts to relieve credit strains, the Fed auctioned nearly $25 billion in super-safe Treasury securities to investment companies today. Bids were placed for $49.6 billion worth of the securities.

In exchange for the 28-day loans of Treasury securities, bidding companies can put up as collateral more risky investments. These include certain mortgage-backed securities and bonds secured by federally guaranteed student loans.

The auction program, which began March 27, is intended to make investment companies more inclined to lend to each other. A second goal is providing relief to the distressed market for mortgage-linked securities and for student loans.

The Fed actions come during an especially tumultuous week. The stock market nose-dived before recovering somewhat on Thursday, and investors have fled to super-safe investments like Treasury securities and gold. Investors on Wednesday briefly were willing to pay more for certain Treasury securities than they expected to get back when the investments matured, a rare event.

At the start of the week Lehman Brothers, the country’s fourth-largest investment bank, filed for bankruptcy protection. A weakened Merrill Lynch, deciding it couldn’t go it alone anymore, found help in the arms of Bank of America. And, AIG was thrown a lifeline.

So far this year, 11 federally insured banks and thrifts have failed, compared with three last year. The country’s largest thrift, Washington Mutual Inc., is faltering.

The New York Sun

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