Banks borrow record amount from Fed

Published 1:52 pm Friday, October 17, 2008

The Federal Reserve reports that banks borrowed in record amounts from its emergency lending facility over the past week, while investment banks drew loans at a brisk — though slightly lower — pace, further evidence of the credit stresses hobbling the country.

The Fed’s report, released Thursday, shows commercial banks averaged a record $99.7 billion in daily borrowing over the past week. That surpassed the old record — a daily average of $75 billion — from the prior week. On Wednesday alone, $101.9 billion was drawn, an all-time high.

For the week ending Wednesday, investment firms drew $131.1 billion. That was down a bit from $134 billion in the previous week. This category was broadened last week 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.

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The Fed report also showed that over the last week $129.6 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.

Squeezed banks and investment firms are borrowing from the Fed because they can’t get money elsewhere. Investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lend it to each other or customers.

The report also showed the Fed has loaned $82.9 billion to insurance giant American International Group. In mid-September, the Fed said it would provide the troubled company a two-year, $85 billion loan. Last week the central bank said it would loan the company an additional $37.8 billion.

The report comes as Washington policymakers battle the worst financial crisis since the stock market crash of 1929.

So far this year, 15 banks have failed, compared with three last year.

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 identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay 1.75 percent in interest for the loans.

Since the Bear Stearns debacle in March, the Fed has taken a series of unprecedented steps to get lending — the economy’s oxygen — flowing more freely again. The central bank has repeatedly tapped its Depression-era authority to be a lender of last resort not only to financial institutions, but also to other types of companies.

Critics worry the Fed’s actions could put billions of taxpayers’ dollars at risk.

Separately Thursday, as part of efforts to relieve credit strains, the Fed auctioned $25 billion in super-safe Treasury securities to investment companies. Bids were placed for $44 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.