A Boatload of Liquidity...or something

David Bowie
The Man Who Sold the World

Would you buy a used car from this man?

Federal Reserve Doubles Lending as Crisis Worsens

Sept. 25 (Bloomberg) -- Commercial banks and bond dealers borrowed $217.7 billion from the Federal Reserve as of yesterday, more than double the prior week, as the financial crisis worsened and private funding dried up.

Loans to commercial banks through the traditional discount window totaled $39.3 billion as of yesterday, up from $33.4 billion, the Fed said. Borrowing by securities firms totaled $105.7 billion, up from $59.8 billion. Under a new emergency program announced Sept. 19, banks borrowed $72.7 billion as of yesterday to buy commercial paper from money-market mutual funds.

The report reflects an expansion of the Fed's balance sheet and emergency-lending programs aimed at halting the yearlong credit crisis by pumping the most credit into the financial system since the Great Depression.

``They are certainly adding a boatload of liquidity,'' said Christopher Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. ``People have had a problem financing'' following the bankruptcy filing last week by Lehman Brothers Holdings Inc.

Discount-window borrowing of $39.3 billion as of yesterday approached the $45.5 billion single-day record for loans from the Fed the day after the 2001 terrorist attacks.

American International Group Inc. , the largest U.S. insurer, drew down $44.6 billion on its $85 billion credit line from the Fed, up from $28 billion as of Sept. 17, the central bank said. The Fed agreed Sept. 16 to rescue AIG with the loan in return for an 80 percent stake for the U.S. government.

New Programs

In a change to today's report, the Fed combined lending through the Primary Dealer Credit Facility, which serves 18 securities firms and began in March, with new programs special to three of them: Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch &Co.

On Sept. 21, the Fed allowed the U.S. broker-dealer units of Goldman Sachs, Morgan Stanley and Merrill to pledge a broader range of collateral and have their London broker-dealer units borrow. The action coincided with the Fed's agreement to let Goldman Sachs and Morgan Stanley convert to commercial banks, putting the two remaining major investment banks under stricter regulation and giving them access to more-favorable Fed loans.

Merrill agreed Sept. 15 to be bought by Bank of America Corp., while the Fed allowed Lehman to fail the same day.

Average daily lending to bond dealers in the seven days through yesterday more than quadrupled to $88.1 billion from $20.3 billion, the Fed said.

The Fed separately has lent $150 billion to commercial banks through the Term Auction Facility, an emergency program begun in December.



Lending Program

The central bank said on Sept. 14 it will accept equities as collateral from securities firms under the PDCF. That day Citigroup Inc. and nine other large banks said they would use the program starting last week as they create a $70 billion lending program.

Today's report, providing statistics as of Sept. 24, doesn't identify borrowers.

The report reflects part of the Treasury Department's plan, begun last week, to sell government securities to expand the Fed's balance sheet. The sales added a daily average of $117 billion of Treasuries to the Fed's coffers in the past week.

Fed holdings of U.S. Treasury securities fell $3.26 billion to a daily average of $476.6 billion in the past week. The central bank had about $791 billion of Treasuries at the start of the credit crisis in August 2007.

Last week, the Fed said it would extend emergency loans to banks to purchase asset-backed commercial paper from money funds after a record exodus of investors from the mutual funds, long considered to be among the safest investments. Average loans in the program's first week totaled $21.8 billion a day.

Commercial Paper

Prime money-market funds held about $230 billion in asset- backed commercial paper that banks could buy with Fed funds, senior Fed staff officials said last week.

The subprime-mortgage collapse has led to $522 billion of writedowns and losses at major financial institutions since the start of 2007.

The three-month London Interbank Offered Rate in dollars was 3.77 percent today, the highest since January. Commercial banks can take out up to 90-day loans from the Fed at 2.25 percent. Primary dealers pay the same rate for overnight loans. The AIG loan accrues interest at three-month Libor plus 8.5 percentage points.

In 2001, the discount rate was a half-point below the Fed's benchmark federal funds rate. In 2003, the Fed reset the discount rate at 1 percentage point above federal funds. The Fed reduced the spread to a half point in August 2007 and to a quarter point in March 2008.

Money Supply

The Fed also reported that the M2 money supply rose by $20.6 billion in the week ended Sept. 15. That left M2 growing at an annual rate of 5.7 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.

During the latest reporting week, M1 rose by $16.2 billion. Over the past 52 weeks, M1 increased 2 percent. The Fed no longer publishes figures for M3.

Bailout Talks to Resume After Impasse

WASHINGTON — President Bush tried to assure Americans on Friday morning that lawmakers and the administration would be able come together and reach an agreement on a proposal to rescue the country’s financial system.

“We are going to get a package passed,” Mr. Bush said, a day after an earlier agreement dissolved amid a flurry of political rancor. “We will rise to the occasion. Democrats and Republicans are going to come together to get a rescue plan passed.”

Mr. Bush spoke as lawmakers and administration officials were gearing up for a second day of discussions about the shape of the $700 billion rescue package. Thursday’s agreement, which seemed like a sure thing by early afternoon, fell apart during a meeting later in the day at the White House.

Wall Street seemed to find some solace in Bush’s comments, Shares, which trading down more than 100 points, cut their loses in half.

Speaking from the White House just after the New York Stock Exchange opening bell, President Bush noted the disagreements among lawmakers about how the rescue should be shaped. “The legislative process is sometimes not very pretty,” he said.

But he said everyone in Washington agreed that action was needed immediately. “There are disagreements over aspects of the plan, but there is no disagreement that something substantial must be done,” he said.

For their part Friday morning, lawmakers from both parties staked out their positions on a round of morning talk shows. Ahead of the anticipated resumption of negotiations later in the morning, the House speaker, Nancy Pelosi, said the urgency of the moment meant that agreement would come within the next 24 hours.

“It will happen because it has to happen,” she said in an interview on ABC’s “Good Morning America, according to Reuters.

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Queen & David Bowie ~ Under Pressure