Big firms testing new lending mechanism
WASHINGTON: Big Wall Street investment companies are taking advantage of the Federal Reserves unprecedented offer to secure emergency loans that are part of a major effort by the central bank to help a financial system in danger of freezing.
The companies averaged $13.4 billion in daily borrowing over the past week from the new lending facility, the central bank said Thursday.
The report does not identify the borrowers.
The report was released as European central banks injected piles of fresh cash into the financial system in an attempt to get nervous banks through the Easter holiday weekend.
On top of adding more liquidity, Mervyn King, the governor of the Bank of England, met with top British bankers to discuss ways to restore “more orderly” market conditions.
The Fed, in a bold move Sunday, agreed for the first time to let big investment houses get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, got under way Monday and will continue for at least six months. It was the broadest use of the Feds lending authority since the 1930s.
Goldman Sachs, Lehman Brothers and Morgan Stanley said Wednesday that they had begun to test the new lending mechanism.
On Wednesday alone, lending reached $28.8 billion, according to the Fed report.
The Fed created a way for investment companies to have regular access to a source of short-term cash. This lending facility is seen as similar to the Feds “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.
The Fed, in another rare move last Friday, agreed to let JPMorgan Chase secure emergency financing from the central bank to rescue the investment bank Bear Stearns from collapse. Two days later, the Fed backed a deal for JPMorgan to take over Bear Stearns.
Thursdays report offered insight on how much credit was extended to Bear Stearns via JPMorgan through the transaction the Fed approved last Friday. Average daily borrowing came to $5.5 billion for the week ending Wednesday.
Separately, the Federal Reserve said it would make $75 billion of U.S. Treasury securities available to big investment companies next week. Investment houses can bid on a slice of the securities at a Fed auction next Thursday; a second is set for April 3.
The Fed will allow investment companies to borrow as much as $200 billion in safe Treasury securities by using some of their more risky investments as collateral. By allowing this, the Fed is hoping to take pressure off financial companies and make them more inclined to lend to people and businesses.
The housing collapse and credit crunch have led to a record number of home foreclosures and resulted in multibillion-dollar losses for financial companies in complex mortgage investments.
