Investment firms tapping Fed for billions
March 27, 2008

WASHINGTON - Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported Thursday.

Those firms averaged $32.9 billion in daily borrowing over the past week from the new lending facility, compared with $13.4 billion the previous week. The program, which began last Monday, is part of the Fed's effort to aid the financial system.

On Wednesday alone, lending reached $37 billion.

The Fed, for the first time, agreed on March 16 to let big investment houses temporarily get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.

Last week, Goldman Sachs, Lehman Brothers and Morgan Stanley said they had begun to test the new lending mechanism. The Fed does not release the identity of the borrowers using the facility.

The Fed created a way for investment firms to have regular access to a source of short-term cash. This lending facility is seen as similar to the Fed's "discount window" for banks. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed.

Investment houses can put up a range of collateral, including investment-grade mortgage backed securities.

Also Thursday, the Fed debuted a separate lending facility where Wall Street firms can borrow Treasury securities and put up risky home-loan packages as collateral.

The Fed auctioned $75 billion worth of Treasury securities. Bidders paid an interest rate of 0.330 percent. The Fed received bids of $86.1 billion worth of the securities. The identity of bidders is not released.

It was the first time the Fed conducted an auction of this kind. The next one is set for April 3.

The program is intended to help financial institutions and the troubled mortgage market. The Fed said it would make as much as $200 billion worth of Treasuries available through weekly auctions that started Thursday.

The goal is to make investment houses more inclined to lend to each other. It also is aimed at providing relief to the distressed market for mortgage-linked securities. Questions about their value and dumping of these securities have driven up mortgage rates, aggravating the housing crisis. Since the Fed's announcement of this new program, rates on some mortgages have eased somewhat.

Federal Reserve Governor Randall Kroszner said in a speech Thursday that curbing shady lending practices that contributed to the housing and credit debacles should help revive the confidence of the public and investors.

"Effective consumer protection can help to restore confidence in the mortgage markets and help to preserve the flow of capital to consumers who wish to purchase a home," Kroszner said.

Under fire from Congress for being too lax in its oversight, the Fed has proposed a way to protect homeowners from dubious lending practices. Subprime borrowers — those with tarnished credit histories or low incomes — have been hurt the most, although problems have spread to more creditworthy borrowers.

The Fed wants to:

  • Restrict lenders from penalizing risky borrowers who pay loans off early.
  • Require that lenders make sure these borrowers set aside money to pay for taxes and insurance.
  • Bar lenders from making loans without proof of a borrower's income.
  • Prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.
  • Curtail misleading ads for many types of mortgages.
  • Bolster financial disclosures to borrowers.

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