Capital Markets

Fed Lending $200 Billion to Loosen Credit

The loan "is intended to promote liquidity in the financing markets."
David KatzMarch 11, 2008

Acknowledging that downward pressure on capital liquidity is increasing, the Federal Reserve announced on Tuesday that it would lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days, rather than overnight, as it does in its existing program.

The Fed said it would do the lending via a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The loan “is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally,” according to a Fed release.

As is the case with its current securities-lending program, the Fed will make the securities available through an auction process. Auctions will be held on a weekly basis beginning on March 27.

Further, the Fed’s Open Market Committee has authorized boosts in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). Those arrangements will now provide up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30.

The announcement triggered a spectacular afternoon stock-market rally, spurring the Dow Jones Industrial Average 416.66 points higher to break 12000 and close at 12156.81, up 3.6 percent. It was the steepest one-day advance in five years, according to Bloomberg News.

Financial companies led the way, with battered Washington Mutual Inc. making its sharpest gain since 2000, according to the news service. Investors speculated that the savings and loan would get a cash infusion from a third party, as well as benefiting from the Fed move. Other big gainers included Citigroup, Wells Fargo, and Bank of America.

One large private-investment manager, Nick Raich of National City Private Client Group, told Bloomberg that the Fed action was like “putting jumper cables onto a battery to kick-start the credit market. They’re doing their best to try to restore confidence.”

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