- The Washington Times - Thursday, April 17, 2008

WASHINGTON (AP) Big Wall Street investment companies are pulling back on their borrowing from the Federal Reserve’s emergency lending program.

The Federal Reserve says in a report Thursday that those firms averaged $24.8 billion in daily borrowing over the past week. That compares with $32.6 billion in the previous week.

The program, which began March 17, is one of several extraordinary actions the Fed has taken recently to limit damage from a trio of crises housing, credit and financial.

After the crash of Bear Stearns, the nation’s fifth-largest investment bank, fears grew that others might be in jeopardy, given major stresses in credit and financial markets.

Scrambling to avert a market meltdown, Fed Chairman Ben Bernanke and his colleagues in the broadest use of the central bank’s lending authority since the 1930s agreed last month to temporarily let investment firms obtain emergency financing from the Fed, a privilege that previously had been granted only to commercial banks.

The program, similar to the one the Fed has long had for commercial banks, will continue for at least six months. It gives investment firms a place to go for overnight loans. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed.

Banks averaged $7.8 billion in borrowing for the week ending April 16. That compares with $10.2 billion for the previous week. The identities of commercial banks and investment houses are not released.

The Fed’s No. 2 official, Donald Kohn, in a speech Thursday said Wall Street investment firms should be subject to greater regulatory oversight because any severe problems they might encounter can raise dangers to the entire financial system.

“We must worry about excessive leverage and susceptibility to runs not only at banks but also at securities firms,” Kohn, vice chairman of the central bank, said in remarks to a credit forum in Charlotte, N.C.

The Fed’s decision to step in and act as a lender of last resort to investment firms something it has been doing for commercial banks for years has generated a debate about whether investment firms should be subject to the type of supervision applied to commercial banks. It also has spurred debate over whether the emergency lending program for investment banks should be made permanent.

“Whatever type of backstop is put in place, in my view greater regulatory attention will need to be devoted to the liquidity risk-management policies and practices of major investment banks,” Kohn said. “In particular, these firms will need to have robust contingency plans for situations in which their access to short-term secured funding also becomes impaired.”

Treasury Secretary Henry Paulson last month said investment firms should face stepped-up regulation if they use the Fed’s emergency lending facility. However, he said it was too soon to determine whether the program should be made permanent.

Investment houses have key roles in the financial system. If one fails or is having difficulty, it could put the whole financial system in jeopardy. That’s because they have complex relationships with many players in the system, including hedge funds, commercial banks and others.

Turmoil in financial markets, which erupted last August, has threatened to plunge the United States into a deep recession.

As part of the effort to relieve credit strains, the Fed auctioned nearly $25 billion in super-safe Treasury securities to investment firms Thursday.

At the auction the fourth of its kind the Fed’s made another $24.999 billion worth of the securities available. The Fed received bids requesting $35.1 billion of the securities.

In exchange for the 28-day loan of Treasury securities, bidding firms can put up more risky investments, including certain shunned mortgage-backed securities, as collateral.

In the four auctions held so far, the Fed has provided close to $158.95 billion worth of the Treasury securities to financial firms.

The program is intended to help financial institutions and the troubled mortgage market. The Fed said it would make as much as $200 billion worth of Treasuries available through weekly auctions.

The goal is to make investment houses more inclined to lend to each other. It also is aimed at providing relief to the distressed market for mortgage-linked securities.

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