Investment Firms Tap Fed for Billions

WASHINGTON — Big Wall Street investment companies have jumped all over the Federal Reserve's unprecedented offer to obtain emergency loans, borrowing more than doubled than in the program's debut week.

Those firms averaged $32.9 billion in daily borrowing over the past week from the new lending program, compared with $13.4 billion the previous week, the central bank reported Thursday. 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.

Banks averaged $550 million in daily borrowing, for the week ending March 26, from the Fed's discount window, compared with $81 million the previous week.

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Fed Chairman Ben Bernanke is scheduled to give lawmakers an updated assessment of the economic and financial situation at a hearing on Capitol Hill next Wednesday.

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.

Demand for Treasury securities at the auction was less than some analysts expected, although that was viewed as a possible sign of less stress in the financial system. Still, many remain wary about financial conditions.

"It seems like the TSLF passed its first test," said T.J. Marta, a fixed-income strategist at RBC Capital Markets. "On the one hand I'm fairly positive about the auction. But on the other hand, we survived today. ... there is a whole lot more pain to come," in terms of more financial losses from the housing and credit debacles, he predicted.

The auction 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:

_restrict lenders from penalizing risky borrowers who pay loans off early.

_require that lenders make sure these borrowers set aside money to pay for taxes and insurance.

_bar lenders from making loans without proof of a borrower's income.

_prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

_curtail misleading ads for many types of mortgages.

_bolster financial disclosures to borrowers.

___

On the Net:

Federal Reserve: http://www.federalreserve.gov/

Comments

[paixa3]

Read the headline, but a damn shame. Give more to business and screw all the rest of us???????

The USA is a 3rd world country.

[fcsakes]

Let us not forget, whenever you see the word "FED" or "government," that means you and I and every other sucker who pays taxes.

Good old republican strategy, suck up the fools' money so that CEO's can retire with billions while we try to figure out whether we should eat this week or just put gas in the car.

[WIpatriot]

GIMME! GIMME!! GIMME!!!

[10ghostcommander]

What are the reserves of these investment banks compared to the reserves of the Fed.? Why did they not 'trickle down' lower mortgage interest rates, lower credit card interest rate, lower auto loan interest rates, lower student loan interest rates and lower late payment fees, and lower NSF fee's. If this was done in the very beginning we would not be in the economic mess we are in and are still facing more in the coming months. Does the Fed know what are on the books of the investment banks? Or is this just another ending chapter in the fraud? Investment banks do not put all their investment eggs in just one basket. Will we ever know what was in Bear Stearns portfolio? I am going to declare myself an investment bank and go to the Fed's open window for a loan that is lower than the rate of inflation--I cannot lose and may even earn up to 25% return on my investments--I cannot lose!

[bluesnot]

Surely, this lending is being carefully monitored. Surely, there are regulations in place. You know, like the regulations that would have prevented the mess in the first place. Just dreaming..­..

[WIpatriot]

Surely, you jest.

[bogananda666]

No one knows what's on the books of these investment bankers, that's the problem. It's corrupt because it is designed to be corrupt so no one knows what's on the books or the value of what's on the books. It is a big con game and the American taxpayers will foot the bill, despite what the Fed or the government claim. WE wouldn't know what they're doing anyway. These are bad loans the Fed is buying because no one else will buy them. The only entity that can afford such impudent bad loans is the entity that can print up money, which is the Fed.

[themodernleader]

It is to be expected that permitting swindlers who have wrecked our financial system, to remain in control will result in an additional swindle in attempting to bail out all the swindling miscreants. That is exactly what is happenting as 400 billion has already been consumed by the Fed to cover up the crime of the Century. But the task is hopeless. The result of the cover-up swindle is to wreck--erode further-- the Amercan dollar. Ninety five percent of the American people including me and my family will suffer for the sake of the few. And the harm will reverberate down through the generations of subjugated Americans.

[loki]

When these so called "loans" are due, will anyone really pay them back?

Also

Just where is the Fed getting these Billions of Dollars?

Tax payer? Do they just Print it , deflating it more? Or do they just wave a magic wand?

[NicoleAnonymous]

They have money that they use when commercial banks need a loan but those banks are regulated and investment banks aren't so the Fed isn't supposed to loan money to them.

But Bernake and Paulson will do anything to save their buddies at the investment banks.

[bogananda666]

It could be that they may be bribed, Bernake and Paulson, for saving their buddies on Wall Street. Do you thunk.

[laylahb]

As I said about a month ago, "Fire up the printing presses, full speed ahead, it's going to be a very bumpy ride."

Just want to know, where can I get me some of that 2.5% money?

[ZingoBonMot]

Suuuuuuuuu­ck...Suuuu­uuck....Su­uuuuuuck..­..Slurp.
There goes the last of our Social Security "Trust Fund".

[NicoleAnonymous]

I do anything Bankers ask me to including their laundry and dishes.

Henry "I work for Jamie Demon" Paulson

[maggiemae656]

Where will a credit based economy take us next? We are were we're at because of excessive credit, and the answer is to increase credit lines? How long do you figure that will last? I truly hope this infusion of available cash will be staying in this country.

[bogananda666]

It doesn't take being a genius to realize that a society based on credit is not a long term strategy for a society to be successful. Common sense, which isn't common, dictates this is a failure because it's based on just printing up money. The wealthy amass riches upon their already amassed riches with this type of system and it is facilitated by government, business and churches propaganda although a legitimate church will tell its congregation about the biblical warning concerning credit which is don 't be in debt. In fact Christ trashed the money changers,creditors, much more adamantly than he did homosexuals,and prostitutes. Christ never went into a whorehouse to trash it nor did he ever barge into a homosexual encounter. He did go into the temple and violently , his only act of violence, trashed and through t he money lenders, the Kenites posing as Jewish priests, out. This is what sealed his doom to be crucified as the Kenites then conspired to have him killed, John 8:44. The Kenite's were the scribes for the Levite's, who were the were the Jewish priesthood,but pretended to be the priests which corrupted the Jewish priesthood.

[MajorKong]

I believe they call this "Privatizing profits and socializing losses".

[dadw5boys]

There is an estimated $14.6 tillion of bad debts comming in the next few months.
So many Investor held loans with little or no security that many banks could fail if stuck with the loans they made.

[plainsman]

How else would you control the population and activate PDD51.

"Catastrophic Emergency" means any incident, regardless of location, that results in extraordinary levels of mass casualties, damage, or DISRUPTION severely affecting the U.S. population, infrastructure, environment, ECONOMY, or government functions;"

[ErnestineBass]

Aw, crap, plainsman, now I'm not gonna sleep at all tonight...­*shiver*

[LivingStardust]

Martial law = Revolution. Count on it.

[Rog49Thomas]

There's an estimate of $1.2 trillion in losses of which about 15% has been provisioned so far.

There are approximately $64 billion of medium term note programs supporting SIVs purchases of securities (primiarly mortgage backed) coming due this year - roughly divided equally over each quarter.

The problem is that this situation has frozen up the markets worldwide. And that is leading to dramatic consequences across the board that will affect the world economy. Just in the USA corporate liquidity has dropped by $250 billion in 1Q08. This will mean less investment by firms, retrenchment etc. And the corporate sector (ex financial sector) is in reasonably good shape now.

There are other "bombs" out there - credit derivatives is a big one.

The reason that the monetary authorities are scrambling with their kitchen sink approach to solving the crisis is because they are frantically trying to prevent a replay of the 1930's global depression.

It's that serious.