Big Wall Street Firms Borrow From the Fed

U.S. investment banks are testing a new program set up in conjuction with the rescue of Bear Stearns that allows investment banks to borrow directly from the Federal Reserve, according to people at the banks.

Lehman Brothers Holdings borrowed $2 billion from the Fed's so-called discount window late Tuesday, sources said, a small amount relative to the bank's $375 billion balance sheet.

Goldman Sachs plans to test the discount window sometime this week, a spokesman said. It's unclear how much money the bank will borrow.

Morgan Stanley Chief Financial Officer Colm Kelleher said his bank has already tested the program.

In a bid to stablize jittery markets, the Fed said on Sunday that it would allow investment banks to borrowfrom its discount window using a wide range of investment-grade securities as collateral.

Borrowing from the Fed is usually a privilege reserved for commercial banks. But after the collapse of Bear Stearns , once the fifth-largest U.S. investment bank, the Fed is pumping more money into the U.S. financial system to help stabilize it.

The Fed has also cut the rate at which dealers borrow at the window to 2.5 percent from 3.5 percent, in two separate actions this week.

Shortly before Lehman went to the discount window, CFO Erin Callan told CNBC that the Fed's move made it unlikely that Lehman and other brokerage firms would have to face the kind of liquidity crisis that brought down Bear Stearns.

"It certainly takes the question of liquidity off the table," Callan said in a live interview. "I think [the Fed's decision is] the great news that happened over the weekend.

"It's going to be actively used" by many brokerages, Callan added. “We'll be a participant. It's a great opportunity."

In the CNBC interview, Callan acknowledged that Lehman has had a difficult time recently amid all the rumors that it's in financial trouble.

"We know we're always the next name on the list," she said. “There isn’t a great appreciation for the fact that we’ve evolved our franchise dramatically over the last decade. In fact, we’ve structured our liquidity exactly for this kind of situation. So, we feel like we’re in a good spot."

However, Callan said Lehman's difficulties aren't over. “Expect to see more [writedowns] in the second quarter," she said. "Later in the year things will start to stabilize more in asset prices.”

"It feels like, at this point, the greater part of the calendar year will be rough sledding and I wouldn’t expect it to feel pretty stable until 2009."

In August, when commercial paper markets were seizing up, the Fed cut the discount rate for commercial banks. Soon after that, the four largest U.S. banks and a major international bank borrowed more than $2 billion total at the discount window, to help remove the stigma of getting short-term financing from the central bank.

--Reuters contributed to this story.