Investment houses ease borrowing from Fed
WASHINGTON – Wall Street investment companies are scaling back their borrowing from the Federal Reserve’s emergency lending program.
A Fed report Thursday said the companies averaged $12.3 billion in daily borrowing over the past week, compared with $14.2 billion the previous week.
The program, started March 17, is one of several steps the Fed has taken in response to the fallout from housing, credit and financial troubles.
After a run on Bear Stearns pushed the nation’s fifth-largest investment bank to the brink of bankruptcy in March, fears grew that other Wall Street firms might be in jeopardy. (Bear Stearns becomes part of JPMorgan Chase today after Bear shareholders Thursday approved the $2.2 billion takeover.)
Scrambling to avert a market meltdown, Fed Chairman Ben Bernanke and his colleagues invoked the broadest use of the central bank’s lending power since the 1930s when they agreed to let investment houses obtain emergency financing from the Fed. That was a privilege previously granted only to commercial banks.
The program, similar to one the Fed long has had for commercial banks, will continue for at least six months. It gives investment companies a place to go for overnight loans. Commercial banks and investment companies now pay 2.25 percent in interest for the loans.
Banks have stepped up their borrowing, according to the Fed report. They averaged $15.95 billion in daily borrowing for the week ending May 28, compared with $13.5 billion for the previous week. The identities of commercial banks and investment houses are not released.
The Fed also announced Thursday it will make a fresh batch of short-term cash loans available to banks as part of an effort to ease stressed credit markets.
The Fed said it will conduct three auctions in June; each will offer $75 billion in short-term cash loans. It would mark the latest round in a program that the Fed launched in December to help banks overcome credit problems so they will keep lending to customers.
The new round of auctions will be conducted on June 2, June 16 and June 30.
As part of efforts to relieve credit strains, the Fed auctioned $16.4 billion in Treasury securities to investment companies Thursday.
The latest auction drew bids for less than the $25 billion available. That could be a sign of some improvements in credit conditions.
In exchange for the 28-day loans of Treasury securities, bidding companies can put up as collateral more risky investments. These include certain mortgage-backed securities and bonds secured by federally guaranteed student loans.
The auction program, which began March 27, 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.