The US Federal Reserve announced late on Sunday several steps to cope with the worst US credit crisis in decades, including broadening the types of assets that investment banks can put up to get emergency loans from the Fed.
Federal Reserve Chairman Ben Bernanke announced the actions in a statement, saying they were being taken after a weekend of discussions with officials from the Treasury Department and the Securities and Exchange Commission (SEC) and top executives of financial firms.
Those talks were aimed at seeing whether another financial institution would be willing to take over venerable investment bank Lehman Brothers and failing that, how other institutions could pool resources to protect the global financial system.
Bernanke said the discussions had been aimed at identifying “potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses.”
MITIGATING RISKS
“The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets,” Bernanke said.
Besides expanding the types of collateral that can be used, he said the Fed would also increase the frequency of some of the auctions being used to get loans to banks from every other week to a weekly basis.
In a separate statement Treasury Secretary Henry Paulson said he supported the Fed’s moves and said the actions taken should “strengthen and enhance our financial markets. These initiatives will be critical to facilitating liquid, smooth functioning markets and addressing potential concerns in the credit markets.”
Paulson, who was involved in three days of talks at the New York Federal Reserve Bank, said he appreciated the efforts by other financial firms involved in the discussions to promote “orderliness and stability in our financial markets as we work through this extraordinary environment.”
SEC Chairman Christopher Cox said in a statement that the commission was working to make sure that the customers of Lehman’s broker-dealer operations “will not be adversely affected by recent market events.”
Cox was also involved in the weekend talks that failed to find a buyer for Lehman Brothers.
The Fed’s steps represented the latest in a series of actions the central bank has taken over the past year to try to protect the US financial system from a credit crisis that erupted as a result of rising loses in subprime mortgage lending.
The central bank in August last year invited commercial banks to make use of its emergency loan program if they found themselves short of cash.
Then last December, it expanded the program to auction off loans to cash-strapped banks, seeking to overcome a perceived stigma from banks getting direct assistance from the Fed.
In March, it implemented the biggest expansion in the emergency loan program since the Great Depression by announcing that investment banks could obtain money from the Fed. That action came after the near-collapse of investment bank Bear Stearns, which was taken over with the help from a US$29 billion Fed loan by JP Morgan Chase and Co.
GLOBAL HELP
Moments after the Fed’s announcement on Sunday, a consortium of 10 global commercial and investment banks announced plans to provide US$70 billion to help offset a credit squeeze amid an anticipated collapse of Lehman Brothers.
Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, and UBS, said in a joint statement they “initiated a series of actions to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets.”
The 10 banks agreed to create a “collateralized borrowing facility” of US$70 billion, with each bank contributing US$7 billion, to help ease access to credit.
They also said they would work together “to help facilitate an orderly resolution” of the derivatives exposures between Lehman Brothers and its counterparties.
“These actions reflect the extraordinary market environment,” the statement said.
“The banks are committed to continuing to work closely with one another as well as the US Treasury Department, the Federal Reserve, the Securities and Exchange Commission, governments and regulators around the world, and other market participants, to ensure the industry is doing everything it can to provide additional liquidity and assurance to our capital markets and banking system,” the statement said.
The 10 banks would be able to tap this facility, with any bank eligible for up to one-third of the fund. The amount may be expanded if more banks join the program.
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