Banks, investment firms borrow less from Fed

WASHINGTON - Commercial banks and investment firms scaled back borrowing over the past week from the Federal Reserve's emergency lending program.

The Fed report, released Thursday, said commercial banks averaged $69.1 billion in daily borrowing over the week ending Wednesday. That was down from $87.9 billion in average daily borrowing logged over the week that ended Jan. 7.

Investment firms drew $33.7 billion over the past week. That compared with an average of nearly $36 billion the previous week. This category includes any loans that were made to the U.S.- and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch.

The Fed report also showed that its net holdings of "commercial paper" averaged $334.6 billion over the week ending Wednesday, an increase of $310 million from the previous week. Under the first-of-its-kind program started Oct. 27, the Fed is buying commercial paper — the crucial short-term debt that companies use to pay everyday expenses. The Fed has said about $1.3 trillion worth of commercial paper would qualify.

In a new addition to the report, the Fed said its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae were valued at $5.6 billion as of Wednesday. The goal of this program, which started on Jan. 5, is to help the crippled mortgage-finance and housing markets. Mortgage rates have fallen since the Fed announced the creation of the $500 billion program late last year.

Rates on 30-year mortgages set a record low for a fifth straight week by dropping below 5 percent, the lowest mark since Freddie Mac started tracking the data in 1971, the company said Thursday.

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 that began in December 2007.

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.

The identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay just 0.50 percent in interest for the emergency loans.

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

The Fed's balance sheet now stands at $2.07 trillion. Although that's down from last week's $2.18 trillion, the central bank's balance sheet has mushroomed from just under $900 billion in September. The 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 American International Group's loan from the Fed averaged $39.1 billion for the week ending Jan. 14, up slightly from the previous week.

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