Saturday, September 20, 2008

Wall Street Companies and Banks Ramped Up Borrowing from the Fed

Wall Street companies and Banks ramped up borrowing from the Federal Reserve's (the Fed) emergency loan facility over the past week, a fresh sign of the credit stresses plaguing the country.

According to the Fed’s report that released Thursday said 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 Sept. 17, Wall Street companies drew such loans averaging $20.3 billion. That step-up comes after six straight weeks where they did not draw any loans. Their borrowing averaged as high as $38.1 billion a day over the course of a week in early April.

The report comes as the New York Fed Chairperson Ben Bernanke battles the worst financial collapse in decades. In the last few days, the American financial system has been badly shaken as bad bets on dodgy mortgage-backed securities claimed more Wall Street monsters.

Scrambling to break the grip of a worsening global credit collapse, the Fed and foreign central banks stepped up action Thursday pumping as much as $180 billion in money markets overseas. At home, the Fed acted to ease a spike in overnight loan rates by injecting $55 billion into the U.S. banking system.

President Bush had canceled an out-of-town trip Thursday to stay in Washington and meet with his top economic advisers. Then, Bush held a 40-minute meeting with Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission chief Christopher Cox along with White House and Treasury Department aides.

Investment houses in March were given similar, emergency-lending privileges as commercial banks after a run on Bear Stearns pushed what was the nation's 5th-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 acquired by JPMorgan Chase & Co. in a deal that involved the Fed's financial backing. In addition, 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.

The Fed's expanded loan programs, its involvement in the Bear Stearns rescue and the government's bailout of Fannie and Freddie have spurred concerns that these actions could put taxpayers on the hook for billion of dollars and encourage "moral hazard," where companies take on extra risks because they trust the government will come to their aid.

Separately, as part of efforts to aid credit strains, the Fed auctioned nearly $25 billion in super-safe Treasury securities to investment firms Thursday. Bids were placed for $49.6 billion worth of the securities. In exchange for the 28-day loans of Treasury securities, bidding firms can put up as collateral more risky investments. These include certain bonds and mortgage-backed securities secured by federally guaranteed student loans.

The auction program, which began March 27, is intended to make investment firms 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 has nosedived and investors have fled to super-safe investments like gold and Treasury securities. Briefly, on Wednesday, investors 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 4th-largest investment bank, filed for bankruptcy protection. A weakened Merrill Lynch, deciding it could not go it alone anymore, it would go to bankruptcy, found help in the arms of Bank of America. Insurance giant company, American International Group (AIG) was given an $85 billion emergency loan from the Fed in a deal of allowing the government to take control of the company.

Therefore, 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.

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