Fed Extends Emergency Borrowing for Wall Street
The Federal Reserve said it is extending its emergency borrowing program to Wall Street firms and is taking other steps to ease a severe credit crunch that has hobbled the national economy.
The Fed said the program, where investment houses can tap the central bank for a quick source of cash, will now be available through Jan 30. Originally the program, started on March 17, was supposed to last until mid-September.
Another program, where investment firms can temporarily swap more risky investments for super-safe Treasury securities also will continue through Jan. 30, the Fed said.
And, it also will let commercial banks, in a separate program, be able to bid on cash loans that last longer—for 84 days, besides the 28-day loans now available.
The Fed said it was taking these steps "in light of continued fragile circumstances in financial markets."
The Fed said that the emergency borrowing program for investment houses and the program that lets investment firms temporarily borrow Treasury securities would be withdrawn should the Fed determine that conditions in financial markets are "no longer unusual and exigent." (CNBC Economic Correspondent Steve Liesman explains the Fed moves in the video).
Investment houses were given similar, emergency loan privileges as commercial banks after a run on Bear Stearns pushed 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.
In the swap program, which began on March 27, investment firms bidding on the Treasury securities can put up as collateral more risky investments.
These include certain mortgage-backed securities and bonds secured by federally guaranteed student loans. The program 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.
Starting on Aug. 11, the Fed will give banks the option of bidding on 84-day cash loans from the Fed, besides the 28-day loans now available.
Specifically, the Fed will conduct biweekly auctions. They will alternate between making available $75 billion in 28-day loans and $25 billion in 84-day loans.
The steps expand a program started in December aimed at helping banks overcome their credit problems so that they can keep lending to customers.
The European Central Bank and the Swiss National Bank have informed the Fed that they also will make available to their banks similar 84-day cash loans.
The Fed also boosted its credit line with the ECB to $55 billion from $50 billion.