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Fed Expands Recovery Options For Commercial Banks

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By JEANNINE AVERSA

The Associated Press

Published: July 31, 2008

WASHINGTON - Focused on getting the nation's credit gears smoothly working again, the Federal Reserve is letting Wall Street firms draw emergency loans into next year and giving financial companies more options to help them overcome credit problems.

The Fed's announcement Wednesday marks its latest effort to get credit - the economy's oxygen - flowing more freely. A global credit crisis that erupted last August has hobbled the U.S. economy, already reeling from a housing meltdown.

As financial companies racked up multibillion-dollar losses on soured mortgage investments and credit problems spread to other areas, firms have hoarded cash and clamped down on lending. That has crimped spending by people and businesses, which in turn has weighed on the national economy - a vicious cycle the Fed wants desperately to break.

To that end, the Fed announced that investment houses now can tap the central bank for a quick source of cash through Jan 30. Originally the program, started March 17, was supposed to last until mid-September.

Another program, in which investment firms can temporarily swap more risky investments for super-safe Treasury securities, also will continue through Jan. 30, the Fed said. And, in a separate program, it will let commercial banks bid on cash loans that last longer - 84 days - in addition to the 28-day loans now available.

The Fed said it was taking these steps "in light of continued fragile circumstances in financial markets."

This week, Merrill Lynch & Co. announced plans to write down another $5.7 billion tied to bad mortgage debt, raising fears that other banks and financial firms will follow.
Merrill Lynch said it would sell repackaged mortgage-backed securities for just $7 billion - only a few weeks after they had been valued at $31 billion. The decision gave the securities a value of about 22 cents on the dollar and set a new, low benchmark that other Wall Street banks - including Citigroup, Lehman Brothers, Morgan Stanley and JPMorgan Chase & Co. - might have to meet when valuing their own investments.

"This is no time to pull the liquidity rug out from under financial companies," said Ken Mayland, president of ClearView Economics.

Although Fed Chairman Ben Bernanke has said the central bank's efforts have helped ease some stresses, he also has said markets remain fragile and that it will take time to return them to good health.

Now that inflation worries have forced the Fed to halt a nearly yearlong campaign of bracing rate cuts, the central bank will be looking for other ways - such as those announced Wednesday - to help ease financial problems. The Fed is expected to leave its key rate steady when it meets next week.

"Ramping up the liquidity facilities, while at the same time keeping benchmark borrowing rates steady, looks like the best strategy for dealing with the twin threats financial stresses and inflation fears at this particular juncture," said Brian Bethune, economist at Global Insight.

Investment houses were given similar, emergency loan privileges as commercial banks after a run on Bear Stearns pushed the nation's fifth-largest investment bank to the brink of bankruptcy.

In the swap program, which began March 27, investment firms bidding on the Treasury securities can put up as collateral more risky investments. These include certain mortgage-backed securities and bonds secured by federally guaranteed student loans.

The program 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 student loans.

The Fed also said it will let Wall Street firms place bids on an option to borrow the Treasury securities. Up to $50 billion would be made available. The Fed didn't say when the first auction of this type would be conducted.

Starting on Aug. 11, banks will get the option of bidding on 84-day cash loans from the Fed. The Fed will conduct biweekly auctions, alternating the availability of $75 billion in 28-day loans and $25 billion in 84-day loans. The steps expand a program started in December aimed at helping banks overcome their credit problems so they can keep lending to customers.

The European Central Bank and the Swiss National Bank have informed the Fed that they also will make available to their banks similar 84-day cash loans. To help on this front, the Fed boosted its credit line with the European Central Bank to $55 billion from $50 billion.

Meanwhile, the European Central Bank and the Swiss National Bank announced Wednesday they will make billions of U.S. dollars available to banks still starving for the currency. The European Central Bank - the central bank for the 15 countries that use the euro - said it will make 84-day loans available starting Aug. 8. The Swiss National Bank said it would start making 84-day loans available Aug. 12.

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