Feds make rare weekend move
WASHINGTON (AP) - March 17, 2008 The central bank, in an extraordinarily rare weekend move, took
the bold action Sunday in an attempt to calm the markets. It also
approved a cut in its emergency lending rate to financial
institutions to 3.25 percent from 3.50 percent, effective
immediately.
"These steps will provide financial institutions with greater
assurance of access to funds," Federal Reserve Chairman /*Ben
Bernanke*/ told reporters in a brief conference call Sunday evening.
The Fed acted just after /*JPMorgan Chase & Co./* agreed to buy
rival Bear Stearns Cos. for $236.2 million in a deal that
represents a stunning collapse for one of the world's largest and
most venerable investment houses. Just on Friday the Fed had raced
to provide emergency financing to cash-strapped /*Bear Stearns*/
through JPMorgan. Days earlier the Fed announced a set of other
unconventional steps to thaw out a credit market in danger of
freezing shut.
The Fed's actions come as fears have spread that other financial
houses could also be on shaky ground.
"It seems as if Bernanke & Co. are pulling out all the stops to
avoid a serious financial market meltdown," Richard Yamarone, an
economist at Argus Research, said Sunday evening.
However on world financial markets, Asian stocks plunged Monday
after the JPMorgan and Fed announcements. Markets in Australia and
New Zealand were also off and European stocks fell in early
trading.
Oil prices hit a record in Asian trading as the value of the
dollar continued its free fall and U.S. stock index futures were
down sharply, suggesting Wall Street would open lower after sinking
Friday.
"There is persistent credit uncertainty. Market players have
been repeatedly let down which shows the subprime mortgage problems
are so deep-rooted," said Atsuji Ohara, global strategist of
Shinko Securities in Tokyo.
President Bush has scheduled a White House meeting Monday
afternoon with his Working Group on Financial Markets, which
includes Bernanke, Treasury Secretary Henry Paulson and Securities
and Exchange Commission Chairman Christopher Cox.
Paulson said Sunday, "I appreciate the additional actions taken
this evening by the Federal Reserve to enhance the stability,
liquidity and orderliness of our markets."
The new lending facility - described as a cousin to the Fed's
emergency lending "discount window" for banks - is geared to give
major investment houses a source of short-term cash on a regular
basis - if they need it.
That's important because those big investment houses have key
roles in the financial system and if one fails or is having
difficulty it could put the whole financial system in jeopardy,
said Mark Zandi, chief economist at Moody's Economy.com. These big
investment houses have complex relationships with many players in
the system, including hedge funds, commercial banks and others.
The lending facility will be in place for at least six months
and "may be extended as conditions warrant," the Fed said. The
interest rate will be 3.25 percent and a range of collateral -
including investment-grade mortgage backed securities - will be
accepted to back the overnight loans.
The "discount" rate cut announced Sunday applies only to the
short-term loans that financial institutions get directly from the
Federal Reserve. It doesn't apply to individual borrowers.
The Fed's actions are the latest in a recent string of
innovative steps to deal with a worsening credit crisis that has
unhinged Wall Street.
The action comes just two days before the central bank's
scheduled meeting on Tuesday, where another big cut to a key
interest rate that affects millions of people and businesses is
expected to be ordered. That key rate is now at 3 percent and is
expected to be cut by at least three-quarters of a percentage point
on Tuesday.
The Fed said in a statement that the steps are "designed to
bolster market liquidity and promote orderly market functioning ...
essential for the promotion of economic growth."
Even with the Fed's aggressive moves, economic and financial
conditions keep deteriorating. An increasing number of economists
believe the country already has slipped into its first recession
since 2001. Many economists think that the economy is shrinking now
in the January-to-March quarter. The first government figures on
first-quarter economic activity will be released in late April.
The Fed on Sunday also approved the financing arrangement
through which JPMorgan will acquire Bear Stearns. JPMorgan said the
Fed will provide special financing for the deal. The central bank
has agreed to fund up to $30 billion of Bear Stearns' less liquid
assets, according to JPMorgan.
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AP Business writers Joe Bel Bruno and Madlen Read contributed to
this report from New York.