Banks borrow less, investment firms more from Fed

March 26, 2009 1:43:56 PM PDT
Commercial banks trimmed their borrowing over the past week from the Federal Reserve's emergency lending program, while investment houses drew more loans. The Fed reported Thursday that commercial banks averaged $62.8 billion in daily borrowing over the week that ended Wednesday. That was down from $65.7 billion in average daily borrowing logged over the week that ended March 18.

Investment firms drew $20.1 billion over the past week from the Fed program. That was up from an average of $19.7 billion the previous week.

The identities of financial institutions that borrow from the Fed program are not released. They now pay just 0.50 percent in interest for the emergency loans.

In a new addition to this week's report, the Fed said it provided a total of $4.7 billion in loans to investors through its new program that aims to jump-start lending to consumers and small businesses. The loans were provided Wednesday.

Under the Term Asset-Backed Securities Loan Facility, or TALF, big investors and companies use the money to buy newly issued securities backed by auto loans, student loans, credit cards and other consumer debt.

Meanwhile, the Fed's net holdings of "commercial paper" averaged $240.8 billion over the week ending Wednesday, a decrease of $228 million from the previous week.

The first-of-its-kind program started on Oct. 27, a time of intensified credit problems when the Fed began buying commercial paper - the crucial short-term debt that companies use to pay everyday expenses. The central bank has said about $1.3 trillion worth of commercial paper would qualify.

The Fed also said its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae averaged nearly $237 billion over the past week, up $10.5 billion from the previous week. The goal of the program, which started on Jan. 5, is to help the crippled mortgage-finance and housing markets. Mortgage rates have dropped since the Fed announced the creation of the program late last year.

Rates on 30-year mortgages tumbled to new lows this week. Freddie Mac reported Thursday that rates on 30-year mortgages averaged 4.85 percent this week, down from 4.98 percent last week and the lowest on records dating back to 1971.

Squeezed banks and investment firms are borrowing from the Fed because they can't get money elsewhere. Investors have cut them off and shifted their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers. The lockup in lending has contributed to the recession, now in its second year.

Investment houses last March were given similar emergency-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 and into a takeover by JPMorgan Chase & Co.

Critics worry the Fed's actions have put billions of taxpayers' dollars at risk.

The central bank's balance sheet now stands at $2.05 trillion, up from last week's $2.04 trillion, partly reflecting loans from the new consumer credit program. The Fed's balance sheet has ballooned since September when it was just under $900 billion.

That growth reflects the Fed's many unconventional efforts - various programs to lend or buy debt - to mend the financial system and jolt the economy out of recession.

The report also said that credit provided to insurer American International Group Inc. from the Fed averaged $43.6 billion for the week ending Wednesday, about the same as the previous week. AIG - faced with increasing financial stresses - recently received a fresh aid package from the government. The company's decision to pay employees millions in bonuses ignited a public outrage.

Earlier this week, Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner said the debacle underscores the need for Congress to provide new powers to take over troubled nonbank financial giants to minimize damage to the economy.

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