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Institutions step up borrowing from the Fed

Banks and investment firms ramped up borrowing from the Federal Reserve's emergency lending facility over the past week, more proof of the credit stresses plaguing the country.
/ Source: The Associated Press

Banks and investment firms ramped up borrowing from the Federal Reserve’s emergency lending facility over the past week, more proof of the credit stresses plaguing the country.

A Fed report released Thursday said commercial banks averaged $39.36 billion in daily borrowing over the past week. That compared with a daily average of $21.6 billion in the previous week.

For the week ending Wednesday, investment firms drew $88.15 billion. In a change, this category was broadened to include any loans that were made to the U.S. and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch. On Wednesday alone, a record $105.7 billion was borrowed.

Last week, Wall Street firms averaged $20.3 billion in daily borrowing.

The Fed’s report also showed the central bank has loaned $44.6 billion to insurance giant American International Group. The cash infusion came one week after the government said it would provide a two-year, $85 billion emergency loan to the troubled company.

The Fed report also said that $72.7 billion worth of loans were made to money market mutual funds — via banks — to help the funds, which have been under pressure as skittish investors demand withdrawals.

The report comes as Washington policymakers battle the worst credit crisis since the Great Depression. The Bush administration has proposed to Congress a $700 billion financial bailout to stem the fallout.

Fed Chairman Ben Bernanke has urged quick action, warning that failing to do so would let problems fester, pushing the country into a recession and driving unemployment and home foreclosures even higher.

Investment houses in March were given similar, emergency-loan privileges as commercial banks after a run on Bear Stearns pushed what was the nation’s fifth-largest 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.

The identities of commercial banks and investment houses that borrow 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 has since extended those loan privileges into next year.

The Fed’s expanded lending programs, its involvement in the Bear Stearns rescue and the government’s bailout of mortgage finance giants Fannie Mae and Freddie Mac have spurred concerns that taxpayers could be on the hook for billion of dollars, and that the actions encourage “moral hazard,” where companies take on extra risks because they believe the government will come to their aid.

Separately, as part of efforts to relieve credit strains, the Fed auctioned $37.5 billion in super-safe Treasury securities to investment companies Thursday. Bids were placed for $61.2 billion worth of the securities.

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.

All the Fed’s extraordinary efforts, however, haven’t been able to halt the crisis or prevent a seismic shake-up on Wall Street. Since last week, Lehman Brothers, the country’s fourth-largest investment bank, filed for bankruptcy protection. A weakened Merrill Lynch, deciding it couldn’t go it alone anymore, found help in the arms of Bank of America. AIG was thrown a financial lifeline. And, the last two investment houses — Goldman Sachs and Morgan Stanley — decided to convert themselves into banks to better weather the financial storms.

So far this year, 12 federally insured banks and thrifts have failed, compared with three last year. The country’s largest thrift, Washington Mutual Inc., is faltering.