Investment firms tap Fed for billions
WASHINGTON (AP) - March 27, 2008 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:
-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.
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