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Banks, Wall Street firms step up Fed borrowing

/ Source: The Associated Press

Banks and Wall Street firms stepped up their borrowing over the past week from the Federal Reserve's emergency lending program.

A Fed report released Thursday said commercial banks averaged $17.5 billion in daily borrowing over the past week. That compared with $16.4 billion in the previous week.

Investment houses in March were given similar loan privileges as commercial banks after a run on Bear Stearns pushed the fifth-largest U.S. investment bank to the brink of bankruptcy. The situation raised fears that other Wall Street firms might be in jeopardy.

Bear Stearns was eventually taken over by JPMorgan Chase & Co. in a deal that involved the Fed's financial backing.

For the week ending July 30, Wall Street firms averaged $3 million in daily borrowing. In the prior week, the companies didn't draw such loans. Their borrowing rose as high as $38.1 billion in early April.

The identities of commercial banks and investment houses are not released. Commercial banks and investment companies now pay 2.25 percent in interest for the loans.

In the broadest use of the central bank's lending power since the 1930s, the Fed in March scrambled to avert a market meltdown by giving investment houses a place to go for emergency overnight loans. The Fed extended those loan privileges into next year. Originally they were supposed to last only through mid-September.

Trying to stem eroding investor confidence, the Fed earlier this month said mortgage giants Fannie Mae and Freddie Mac could draw emergency loans from the central bank if they needed. There was no indication in the weekly report that they had done so. Shares of the mortgage giants were clobbered last week as investors grew worried about the companies' financial shape.

Separately, as part of efforts to relieve credit strains, the Fed auctioned nearly $28.1 billion in Treasury securities to investment companies Thursday.

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.