Focused on getting the nation's credit gears smoothly working again, the Federal Reserve is letting Wall Street firms draw emergency loans into next year and giving financial companies more options to help them overcome credit problems.
The Fed's announcement on Wednesday marks its latest effort to get credit – the economy's oxygen – flowing more freely. A global credit crisis that erupted last August has hobbled the U.S. economy, already reeling from a housing meltdown.
As financial companies have racked up multibillion-dollar losses on soured mortgage investments and credit problems have spread to other areas, firms have hoarded cash and clamped down on lending. That has crimped spending by people and businesses, which in turn has weighed on the national economy – a vicious cycle the Fed wants desperately to break.
To that end, the Fed announced that investment houses can now tap the central bank for a quick source of cash through Jan. 30. Originally the program, started on March 17, was supposed to last until mid-September.
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Another program, by which investment firms can temporarily swap more risky investments for super-safe Treasury securities also will continue through Jan. 30, the Fed said.
And, it also will let commercial banks, in a separate program, bid on cash loans that last longer – for 84 days, besides the 28-day loans now available.
The Fed said it was taking the steps “in light of continued fragile circumstances in financial markets.”
Earlier this week, Merrill Lynch & Co. announced plans to write down another $5.7 billion tied to bad mortgage debt, raising fears that other banks and financial firms will follow.
Merrill Lynch said it would sell repackaged mortgage-backed securities for just $7 billion – only a few weeks after they had been valued at $31 billion. The decision gave the securities a current value of about 22 cents on the dollar and set a new, low benchmark that other Wall Street banks – including Citigroup Inc., Lehman Brothers Holdings Inc., Morgan Stanley and JPMorgan Chase & Co. – might have to meet when valuing their own investments.
“This is no time to pull the liquidity rug out from under financial companies,” said Ken Mayland, president of ClearView Economics.