Wall St taps central bank for billions in emergency loans

PUBLISHED : Saturday, 05 April, 2008, 12:00am
UPDATED : Saturday, 05 April, 2008, 12:00am

Big Wall Street investment companies are stepping up their borrowing a bit from the US Federal Reserve's unprecedented emergency lending programme.

On Thursday, the Fed reported that those firms averaged US$38.1 billion in daily borrowing over the past week from the new lending programme.

That compared with US$32.9 billion in the previous week and US$13.4 billion in the first week the lending facility opened.

The programme, which began on March 17, is part of the Fed's efforts to aid the financial system.

This was the first time the Fed agreed to let big investment houses temporarily get emergency loans directly from the central bank.

This mechanism, similar to one available for commercial banks for years, will continue for at least six months. It is the broadest use of the Fed's lending authority since the 1930s.

Fed chairman Ben Bernanke and his colleagues opened the facility as it raced to deal with the sudden crash of the venerable Wall Street firm Bear Stearns, which was on the brink of bankruptcy.

Fearful that other investment firms could be in jeopardy given the intense fear that gripped the markets at that time, the Fed moved to give investment firms a place to go for overnight cash loans.

Doing this was 'a very substantial step', Mr Bernanke said. 'We didn't take it lightly.'

The lending facility is seen as similar to the Fed's 'discount window' for commercial banks, where the Fed acts as a lender of last resort.

Commercial banks and investment firms pay 2.5 per cent in interest for overnight loans from the Fed.

Banks also stepped up their borrowing from the Fed's discount window. Lenders averaged US$7 billion in daily borrowing for the week to Wednesday.

That compared with US$550 million in average daily borrowing for the previous week.

The identities of commercial banks and investment houses borrowing from the Fed's emergency lending facilities are not released.

On Thursday, the Fed, in the second operation of its kind, auctioned another US$25 billion of treasury securities to investment firms.

Bidders paid an interest rate of 0.16 per cent. The Fed received bids of US$46.9 billion worth of the securities.

Bidders, who are not identified, can put up risky home loan packages as collateral.

That programme is intended to help financial institutions and the troubled mortgage market.

The Fed also said that it would make as much as US$200 billion worth of treasuries available through weekly auctions that started on March 27.

The goal is to make investment houses more inclined to lend to each other. It is also aimed at providing relief to the distressed market for mortgage-linked securities.

Discount window

Programme seeks to help financial institutions and ailing mortgage market

Over the past week, Wall St firms' daily borrowing from the Fed's new lending programme averaged, in US$38.1b



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