Capital Markets

The Street Weaning Itself from The Fed

The credit crisis finally shows signs of abating as investment banks cut down on their emergency borrowing from the central bank.
Stephen TaubApril 18, 2008

More good news on the credit front: with the stock markets battling back, the largest Wall Street firms are cutting way back on their borrowing from the Federal Reserve’s emergency lending program, the Associated Press reports. That could mean their credit problems have passed their peak.

Citigroup’s stock rallied on Friday, even though the embattled bank reported a $5.1 billion loss in the first quarter due to poor bets on mortgages and leveraged loans. The amount was half of Citi’s loss in the previous quarter. Investors apparently were heartened simply because there were no negative surprises in the report. Merrill Lynch, meanwhile, reported a loss of about $2 billion after taking more than $6.5 billion in new write-offs.

But on Thursday the Federal Reserve reported that investment banks averaged $24.8 billion in daily borrowing in the past week, down 25 percent from $32.6 billion the previous week, according to the AP. It was the second straight week investment firms borrowed less from the central bank.

The unprecedented emergency program, which began on March 17, is widely credited with helping to stabilize the credit crisis. The privilege of obtaining overnight loans was previously granted only to commercial banks. The program, which provides a 2.5 percent interest rate, is scheduled to continue for at least six months.

“It’s an encouraging sign that maybe the worst of the credit crisis is indeed behind us,” Richard Yamarone, an economist at Argus Research, told the AP. The wire service also quoted T.J. Marta, a fixed-income strategist at RBC Capital Markets, saying: “Now we’re finding less stress on all points of the system because the Fed has thrown out a diverse, broad-reaching safety net.”

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