Fed cuts lending rate for institutions
WASHINGTON – As Treasury Security Henry Paulson made the rounds of television news shows saying the Bush administration will “do what it takes” to minimize economic damage, Fed Chairman Ben Bernanke on Sunday announced new steps to help squeezed financial institutions get cash infusions – a fresh effort to provide relief to a spreading credit crisis.
All eyes now are on Wall Street as leading financial advisers prepared for a meeting today with President Bush and the Federal Reserve weighs another deep interest rate cut on Tuesday.
Paulson defended the Federal Reserve’s extraordinary step Friday to provide emergency financing to one of Wall Street’s most venerable firms, Bear Stearns Cos. The central bank’s intervention was “the right decision,” he said.
The treasury chief sidestepped questions about what would have happened if the Fed had not ridden to the rescue, whether other firms are on shaky ground and the possibility of additional bailouts similar to Bear Stearns’.
At the same time, however, Paulson sought to send a calming message that the administration is on top of the turbulent situation. “The government is prepared to do what it takes to maintain the stability of our financial system,” he said. “That’s our priority.”
The central bank approved a cut in its lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created another lending facility for big investment banks to secure short-term loans.
“These steps will provide financial institutions with greater assurance of access to funds,” Bernanke said in a brief conference call Sunday evening.
The new lending facility will be available to financial institutions starting today. It will be in place for at least six months and “may be extended as conditions warrant,” the Fed said. The interest rate will be 3.25 percent and a range of collateral – including investment-grade mortgage backed securities – will be accepted to back the loans.
The steps are “designed to bolster market liquidity and promote orderly market functioning,” the Fed said in a statement. “Liquid well-functioning markets are essential for the promotion of economic growth.”
The Fed also approved the financing arrangement announced Sunday in which JPMorgan Chase & Co. will acquire rival Bear Stearns Cos. The deal is valued at $236.2 million, a stunning collapse for one of the world’s largest and most venerable investment banks. The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.
Paulson said he was pleased by Sunday’s developments: “Last Friday, I said that market participants are addressing challenges and I am pleased with recent developments. I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets.”
The “discount” rate cut announced Sunday covers only short-term loans that financial institutions get directly from the Federal Reserve.
Even with the Fed’s aggressive moves, economic and financial conditions continue to deteriorate. The Fed in recent days has taken extraordinary steps to help banks and Wall Street investment firms survive the stresses of the credit crisis. Financial institutions have racked up multibillion-dollar losses when mortgage-backed investments soured with the collapse of the housing market.
The Fed this past week also said it would pour as much as $200 billion into big Wall Street banks and investment houses and allow them to put up risky home-loan packages as collateral. This maneuver was intended to bring sorely needed relief in the market for mortgage securities. The Fed also has offered as much as $200 billion in short-term loans to banks and large financial institutions.