For the week ending Sept. 10, Wall Street firms didn't take out any loans. Their borrowing, however, averaged as high as $38.1 billion a day over the course of a week in early April.
The report comes as Lehman Brothers Holdings Inc., the nation's fourth-largest investment firm, sought a financial lifeline that would rescue the 158-year-old company from bad bets on real-estate holdings that has factored into bank failures and taken out other financial companies.
"A number of markets remain disrupted and illiquid," Donald Kohn, the Federal Reserve's vice chairman told a conference here Thursday. "But I believe that they would have been even more illiquid and the risk of disruptive runs even greater without our various facilities," Kohn added.
Investment houses in March were given similar loan privileges as commercial banks after a run on Bear Stearns pushed what was the nation's fifth-largest investment bank to the brink of bankruptcy. The situation raised fears that other Wall Street firms might be in jeopardy.
Bear Stearns was eventually taken over by JPMorgan Chase & Co. in a deal that involved the Fed's financial backing.
The identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay 2.25 percent in interest for the loans.
In the broadest use of the central bank's lending power since the 1930s, the Fed in March scrambled to avert a market meltdown by giving investment houses a place to go for emergency overnight loans. The Fed has since extended those loan privileges into next year. Originally they were supposed to last through mid-September.
The Bush administration stepped in Sunday to take over troubled mortgage giants Fannie Mae and Freddie Mac, effectively putting the government at the heart of the mortgage-finance business. The takeover has the potential to put billions of taxpayers' dollars at risk. The action means that Fannie and Freddie won't be tapping the Fed's emergency borrowing program for a quick source of cash. The Fed in July told the companies that they could draw loans directly from the central bank if they needed cash to stay afloat.
The Fed's expanded lending programs, its involvement in the Bear Stearns rescue and the government's bailout of Fannie and Freddie have spurred concerns that these actions could put taxpayers on the hook for billion of dollars and encourage "moral hazard," where companies take on extra risks because they believe the government will come to their aid.
Separately, as part of efforts to relieve credit strains, the Fed auctioned nearly $40.85 billion in super-safe Treasury securities to investment companies Thursday. The Fed was making $75 billion worth of the securities available.
In exchange for the 28-day loans of Treasury securities, bidding companies can put up as collateral more risky investments. These include certain mortgage-backed securities and bonds secured by federally guaranteed student loans.
The auction program, which began March 27, is intended to make investment companies more inclined to lend to each other. A second goal is providing relief to the distressed market for mortgage-linked securities and for student loans.
---
On the Net:
Federal Reserve: http://www.federalreserve.gov/
