The Federal Reserve is urgently moving to contain a deepening credit crisis and restore confidence in panicked financial markets by becoming a lender of last resort for Wall Street investment houses, which were able to secure short-term emergency loans beginning Monday.
On Wall Street, investors remained somewhat skittish. The Dow Jones industrials, which were down more than 175 points in early trading, moved into positive territory later in the morning. Trading on world markets was down sharply.
President Bush rushed to strike a note of calm to the turbulent situation on Monday morning, hailing the Fed’s action and saying: “We’ve taken strong decisive action.” The president spoke after meeting at the White House with Treasury Secretary Henry Paulson and other members of his economic team. “We’re in challenging times,” Bush said.
The central bank, in an extraordinarily rare weekend move, took the bold action Sunday in an attempt to calm the markets. It also approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately.
“These steps will provide financial institutions with greater assurance of access to funds,” Federal Reserve Chairman Ben Bernanke told reporters in a brief conference call Sunday evening.
The Fed acted just after JPMorgan Chase & Co. agreed to buy rival Bear Stearns Cos. for $236.2 million in a deal that represents a stunning collapse for one of the world’s largest and most venerable investment houses. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JPMorgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.
The Fed’s actions come as fears have spread that other financial houses could also be on shaky ground.
“It seems as if Bernanke & Co. are pulling out all the stops to avoid a serious financial market meltdown,” Richard Yamarone, an economist at Argus Research, said Sunday evening.
Yet anxiety persisted. On world financial markets, Asian stocks plunged Monday after the JPMorgan and Fed announcements. Markets in Australia and New Zealand were also off and European stocks fell in early trading. The Bank of England moved Monday to inject an extra $10.1 billion into its financial system to provide relief.
Oil prices hit a record in Asian trading as the value of the dollar continued its free fall.
“There is persistent credit uncertainty. Market players have been repeatedly let down which shows the subprime mortgage problems are so deep-rooted,” said Atsuji Ohara, global strategist of Shinko Securities in Tokyo.
President Bush has scheduled a White House meeting Monday afternoon with his Working Group on Financial Markets, which includes Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.
Democrats accused Bush of not doing enough to relieve the situation.
“Now we are in the soup and we better get ourselves out of it before the consequences get drastic,” Democratic presidential contender Hillary Rodham Clinton told reporters.
Paulson said Sunday, “I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets.”
The new lending facility — described as a cousin to the Fed’s emergency lending “discount window” for banks — is geared to give major investment houses a source of short-term cash on a regular basis — if they need it.
That’s important because those big investment houses have key roles in the financial system and if one fails or is having difficulty it could put the whole financial system in jeopardy, said Mark Zandi, chief economist at Moody’s Economy.com. These big investment houses have complex relationships with many players in the system, including hedge funds, commercial banks and others.
The lending facility 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 overnight loans.
The “discount” rate cut announced Sunday applies only to the short-term loans that financial institutions get directly from the Federal Reserve. It doesn’t apply to individual borrowers.
The Fed’s actions are the latest in a recent string of innovative steps to deal with a worsening credit crisis that has unhinged Wall Street.
The action comes just two days before the central bank’s scheduled meeting on Tuesday, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered. That key rate is now at 3 percent and is expected to be cut by at least three-quarters of a percentage point on Tuesday.
The Fed said in a statement that the steps are “designed to bolster market liquidity and promote orderly market functioning ... essential for the promotion of economic growth.”
Even with the Fed’s aggressive moves, economic and financial conditions keep deteriorating. An increasing number of economists believe the country already has slipped into its first recession since 2001. Many economists think that the economy is shrinking now in the January-to-March quarter. The first government figures on first-quarter economic activity will be released in late April.
The Fed on Sunday also approved the financing arrangement through which JPMorgan will acquire Bear Stearns. JPMorgan said the Fed will provide special financing for the deal. The central bank has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets, according to JPMorgan.