Investment firms and banks step up borrowing from Fed window

July 17, 2008 by · Leave a Comment
Filed under: Industry News 

Note: As long as we are still using all these new lending facilities to stabilize deposit and investment banks then we are not through this storm yet and it may only get worse.


Wall Street firms and banks stepped up their borrowing over the past week from the Federal Reserve’s emergency lending program.

A Fed report released Thursday said the investment firms averaged $9 million in daily borrowing over the past week. Investment firms didn’t draw such loans in the prior week. Such borrowing rose as high as $38.1 billion in early April.

The Fed opened its emergency program to investment firms on March 17.

Then, the investment houses were given similar loan privileges as commercial banks after a run on Bear Stearns pushed 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.

Banks, meanwhile, averaged $13.9 billion in daily borrowing for the week ending July 16. That compared with $12.9 billion in the previous week.

The identities of commercial banks and investment houses are not released. Commercial banks and investment companies now pay 2.25 percent 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. Chairman Ben Bernanke said the Fed is considering extending those loan privileges – which currently are supposed to last only through mid-September – into next year.

Trying to stem eroding investor confidence, the Fed on Sunday said mortgage giants Fannie Mae and Freddie Mac could draw emergency loans from the central bank if they needed. There was no indication in the weekly report that they had done so. Shares of the mortgage giants were clobbered last week as investors grew worried about the companies financial shape.

Separately, as part of efforts to relieve credit strains, the Fed auctioned $50.75 billion in Treasury securities to investment companies Thursday.

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.

Source: AP

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