THe Banking Challenges

Banks, investment firms trim borrowing from Fed

By JEANNINE AVERSA, AP Economics Writer

WASHINGTON – Commercial banks and investment firms trimmed borrowing over the past week from the Federal Reserve's emergency lending program, a modest sign of some easing in credit strains.

The Fed reported Thursday that commercial banks averaged $64.4 billion in daily borrowing over the week ending Wednesday. That was down from nearly $66 billion in average daily borrowing logged over the week that ended Feb. 18.

Investment firms drew $25.6 billion over the past week from the Fed program. That was down slightly from an average of $26 billion the previous week. This category includes any loans that were made to the U.S.- and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Bank of America Corp.'s Merrill Lynch.

The Fed's net holdings of "commercial paper" averaged $246.2 billion over the week ending Wednesday, a decrease of $4.1 billion from the previous week. It was the fifth straight week that such holdings declined, a positive development that suggests companies are relying less on the Fed for short-term financing needs, economists said.

The first-of-its-kind program started on Oct. 27, a time of intensified credit problems. The Fed then began buying commercial paper — the crucial short-term debt that companies use to pay everyday expenses. The central bank has said about $1.3 trillion worth of commercial paper would qualify.

The Fed also said its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae were valued at $68.7 billion as of Wednesday, up from $65.3 billion last week. The goal of the program, which started on Jan. 5, is to help the crippled mortgage-finance and housing markets. Mortgage rates have dropped since the Fed announced the creation of the $500 billion program late last year.

Squeezed banks and investment firms are borrowing from the Fed because they can't get money elsewhere. Investors have cut them off and shifted their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers. The lockup in lending has contributed to the recession, now in its second year.

Investment houses last 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 and into a takeover by JPMorgan Chase & Co.

The identities of commercial banks and investment houses that borrow from the Fed program are not released. They now pay just 0.50 percent in interest for the emergency loans.

Critics worry the Fed's actions have put billions of taxpayers' dollars at risk.

The central bank's balance sheet now stands at $1.90 trillion, down slightly from last week's $1.91 trillion as the appetite for emergency loans and the use of the Fed's commercial paper program decreased. However, the Fed's balance sheet has more than doubled since September when it was just under $900 billion.

That growth reflects the Fed's many unconventional efforts — various programs to lend or buy debt — to mend the financial system and jolt the economy out of recession.

The report also said that credit provided to insurer American International Group from the Fed averaged $38 billion for the week ending Wednesday, up from $37.4 billion in the previous week. AIG — faced with increasing financial stresses — has been in talks with the government about getting more relief by revamping the terms of its existing bailout package.
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