- The Washington Times - Thursday, March 19, 2009

WASHINGTON (AP) - This is a testc of the Associated Press and is not intended for Publication or Broadcasting

Commercial banks borrowed more from the Federal Reserve’s emergency lending program over the past week, while investment firms drew less.

The Fed, in a report released Thursday, said commercial banks averaged $65.68 billion in daily borrowing over the week that ended Wednesday. That was up from $63.49 billion in average daily borrowing logged over the week that ended March 11.

Investment firms drew $19.68 billion over the past week from the Fed program. That was down from an average of $19.73 billion the previous week.

The identities of financial institutions that borrow from the Fed program are not released. They now pay just 0.50 percent in interest for the emergency loans.

The Fed’s net holdings of “commercial paper” averaged $241 billion over the week ending Wednesday, an increase of $372 million from the previous week. In the previous seven weeks those holdings had declined.

The first-of-its-kind program started on Oct. 27, a time of intensified credit problems when the Fed began buying commercial paper _ the crucial short-term debt that companies use to pay everyday expenses. The central bank has said about $1.3 trillion worth of commercial paper would qualify.

The Fed also said its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae were valued at $236.5 billion as of Wednesday, more than triple last week’s $68.9 billion. The goal of the program, which started on Jan. 5, is to help the crippled mortgage-finance and housing markets. Mortgage rates have dropped since the Fed announced the creation of the program late last year.

And in the Fed’s bold $1.2 trillion effort announced Wednesday to lower interest rates and revive the economy, the central bank will boost its purchases of mortgage-backed securities and debt. The Fed also will start buying government debt.

Squeezed banks and investment firms are borrowing from the Fed because they can’t get money elsewhere. Investors have cut them off and shifted their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers. The lockup in lending has contributed to the recession, now in its second year.

Investment houses last 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 and into a takeover by JPMorgan Chase & Co.

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

The central bank’s balance sheet now stands at $2.04 trillion, up from last week’s $1.88 trillion, reflecting the ramp up in mortgage-backed securities. The Fed’s balance sheet has ballooned since September when it was just under $900 billion.

That growth reflects the Fed’s many unconventional efforts _ various programs to lend or buy debt _ to mend the financial system and jolt the economy out of recession.

The report also said that credit provided to insurer American International Group Inc. from the Fed averaged $43.6 billion for the week ending Wednesday, up from $42.3 billion in the previous week. AIG _ faced with increasing financial stresses _ recently received a fresh aid package from the government. The company’s decision to pay employees millions in bonuses ignited a public outrage, created a public relations headache for President Barack Obama and unleashed fresh congressional furor over the government’s handling of AIG’s bailout.

Separately, the Fed said Thursday it is expanding a $1 trillion program aimed at jump-starting consumer and small business lending.

The program will include securities backed by loans or leases relating to business equipment, car-fleet leases and loans extended by mortgage servicers to cover payments missed by homeowners. The new categories won’t be part of the program’s initial rollout this week, but will be included starting next month.

In its first phase, the Fed will be making up to $200 billion available in three-year loans to investors. Investors will use the money to buy securities backed by autos, student loans, credit cards and other consumer debt. The Fed hopes this program will make loans to consumers and small businesses more widely available at lower rates.

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