Investment firms tapping Fed for billions

They’re averaging $32.9 billion in daily borrowing during past week

WASHINGTON - Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported Thursday.

Those firms averaged $32.9 billion in daily borrowing over the past week from the new lending facility, compared with $13.4 billion the previous week. The program, which began last Monday, is part of the Fed's effort to aid the financial system.

On Wednesday alone, lending reached $37 billion.

The Fed, for the first time, agreed on March 16 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 was the broadest use of the Fed's lending authority since the 1930s.

Last week, Goldman Sachs, Lehman Brothers and Morgan Stanley said they had begun to test the new lending mechanism. The Fed does not release the identity of the borrowers using the facility.

The Fed created a way for investment firms to have regular access to a source of short-term cash. This lending facility is seen as similar to the Fed's "discount window" for banks. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed.

Investment houses can put up a range of collateral, including investment-grade mortgage backed securities.

Also Thursday, the Fed debuted a separate lending facility where Wall Street firms can borrow Treasury securities and put up risky home-loan packages as collateral.

The Fed auctioned $75 billion worth of Treasury securities. Bidders paid an interest rate of 0.330 percent. The Fed received bids of $86.1 billion worth of the securities. The identity of bidders is not released.

It was the first time the Fed conducted an auction of this kind. The next one is set for April 3.

The program is intended to help financial institutions and the troubled mortgage market. The Fed said it would make as much as $200 billion worth of Treasuries available through weekly auctions that started Thursday.

The goal is to make investment houses more inclined to lend to each other. It also is aimed at providing relief to the distressed market for mortgage-linked securities. Questions about their value and dumping of these securities have driven up mortgage rates, aggravating the housing crisis. Since the Fed's announcement of this new program, rates on some mortgages have eased somewhat.

Federal Reserve Governor Randall Kroszner said in a speech Thursday that curbing shady lending practices that contributed to the housing and credit debacles should help revive the confidence of the public and investors.

"Effective consumer protection can help to restore confidence in the mortgage markets and help to preserve the flow of capital to consumers who wish to purchase a home," Kroszner said.

Under fire from Congress for being too lax in its oversight, the Fed has proposed a way to protect homeowners from dubious lending practices. Subprime borrowers — those with tarnished credit histories or low incomes — have been hurt the most, although problems have spread to more creditworthy borrowers.

The Fed wants to:

Paulson calls for broad look at financial rules

Treasury Secretary: Bear Stearns debacle shows need for regulatory review

Paulson on Wall Street woes March 26: Treasury Secretary discusses the Bear Stearns meltdown and the federal government’s actions to ease the credit crunch. CNBC

WASHINGTON - The crash of Wall Street’s once mighty Bear Stearns underscores the need to bring investment houses under the kind of federal oversight that has long been given to commercial banks, Treasury Secretary Henry Paulson said Wednesday.

In a speech to the U.S. Chamber of Commerce, Paulson said the Bush administration will soon release just such a blueprint in an effort to promote a smoother functioning of financial markets.

For months the financial markets — rocked by the double blows of a housing and credit crises — have been suffering through extreme turmoil, threatening to plunge the U.S. economy into a deep recession. The modern U.S. financial system is a complex web of financial players — institutions and individuals and practices that are subject to different rules and regulations. Commercial banks, long a financial bedrock, are subject to regulations and supervision.

“This latest episode has highlighted that the world has changed as has the role of other nonbank financial institutions and the interconnectedness among all financial institutions,” Paulson said. “These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability,” he added.

In extraordinary actions aimed at preventing a meltdown of the U.S. financial system, the Federal Reserve recently backed JP Morgan’s takeover of Bear Stearns and agreed to provide an important multibillion-dollar financial lifeline for the deal. In addition, the Fed, in the broadest use of its lending authority since the 1930s, said it would let squeezed Wall Street investment houses go directly to the Fed for emergency loans. That has long been a privilege just for commercial banks.

Paulson said he “fully supported that action” but said it also raises important policy considerations about the oversight of investment houses.

The secretary said that commercial banks’ access to the Fed’s emergency lending “discount window” has traditionally been accompanied by regulatory oversight and supervision. “Certainly any regular access to the discount window should involve the same type of regulation and supervision,” Paulson said, in an apparent reference to the Fed’s temporary extension of this emergency lending to investment houses.

And he suggested that the Fed collect as much information as necessary on investment houses to “make informed lending decisions.” He said the Fed is currently working to do that. Paulson suggested the Fed, the Securities and Exchange Commission and the Commodity Futures Trading Commission also continue to work to build a framework on this.

“The combination of these steps should provide the Federal Reserve with a structure and the information that it would need to make liquidity backstop loans during periods of market instability to nonbanks,” Paulson said.

Although he praised the Fed’s decision to temporarily provide an short-term loans to investment houses, Paulson said it would be “premature to jump to the conclusion that all broker dealers or other potentially important financial firms in our system today should have permanent access to the Fed’s liquidity facility.”

At this time, the Fed’s action “should be viewed as a precedent only for unusual periods of turmoil,” Paulson said.

Paulson said the administration will explore ways to help struggling homeowners at risk of losing their homes. But he was cool to some of the proposals put forth by Democrats on Capitol Hill, saying that “most are not yet ready for the starting gate.”

In addition, he rejected the need for a “system-wide solution” to deal with homeowners who have no equity in their home. That’s when one’s mortgage eclipses the value of their home.

Fed Chairman Ben Bernanke recently urged lenders to help distressed homeowners by lowering the amount of their loans. He offered this because so many homeowners have little or no equity in their homes, giving them little financial incentives to stay in them.

URL: http://www.msnbc.msn.com/id/23810019/

   Though most us in the working class are not big stock market investors or traders, what happens on Wall Street impacts our lives. The linchpin of the free enterprise system is investments. When banks and individuals stop investing, the wheels of the American and global economy comes to a grinding halt. In my opinion, the Fed bailout of Wall Street investment banks is necessary to keep our economy afloat until the market recovers from the mistakes of sub-prime lending. As long as the Fed is transparent in the measures it takes, however bold, I will trust Fed chairman Ben Bernanke and the Central Banks with keeping the American economy strong for the ultimate good of the American working class.

    (Since this post, through further study and research, I have radically changed my stance on trusting the Fed. Please read my more recent post, "Don't Trust The Fed")

tags: ben bernanke  henry paulson  economy  free enterprise  capitalism  2008  us  depression  

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