DJ UPDATE: US Fed Announces New Steps To Support Financial Mkts
(Updates with additional details of Fed actions)
WASHINGTON (Dow Jones)–The U.S. Federal Reserve late Sunday announced plans
to expand lending programs, hoping to stabilize financial markets after the
collapse of weekend meetings to find a buyer for ailing investment firm Lehman
Brothers (LEH).
The Federal Reserve announced that its board adopted a rule that temporarily
allows banks to provide liquidity to their primary dealer affiliates for assets
typically funded by the tri-party repo market. The rule provides a temporary
exception to certain limits under the Federal Reserve Act. The exception
expires on Jan. 30, 2009, unless it’s extended.
In addition, the Fed said collateral eligible to be pledged at the Fed’s
lending facility for investment banks has been broadened to include corporate
equities and non-investment-grade debt. Previously, Primary Dealer Credit
Facility collateral had been limited to investment-grade debt securities.
The collateral for another lending program known as the Term Securities
Lending Facility also has been expanded to now include all investment-grade
debt securities. Previously, only Treasury securities, agency securities, and
AAA-rated mortgage-backed and asset-backed securities could be pledged.
“These changes represent a significant broadening in the collateral accepted
under both programs and should enhance the effectiveness of these facilities in
supporting the liquidity of primary dealers and financial markets more
generally,” the Federal Reserve said.
The actions were unanimously approved by all five members of the Board of
Governors.
“We have been and remain in close contact with other U.S. and international
regulators, supervisory authorities, and central banks to monitor and share
information on conditions in financial markets and firms around the world,”
said Fed Chairman Ben Bernanke in a statement.
The Fed added that Schedule 2 TSLF auctions will be conducted each week;
previously, Schedule 2 auctions had been conducted every two weeks.
In addition, the amounts offered under Schedule 2 auctions will be increased
to a total of $150 billion, from a total of $125 billion. Amounts offered in
Schedule 1 auctions will remain at a total of $50 billion. Overall, the total
amount offered in the TSLF program will rise to $200 billion from $175 billion.
The announcement comes as high-level weekend talks among U.S. federal
regulators and bankers failed to turn up a buyer for investment firm Lehman
Brothers Holding and the possibility of a Lehman liquidation grows.
Lehman Brothers’ battered shares had continued to slide last week despite the
firm having announced a turnaround plan to shed certain commercial real estate
assets. The 158-year-old firm had been weighed down by troubled real estate
investments and was seeking to raise capital.
According to Wall Street Journal reports, as Lehman began shopping for
buyers, U.S. government officials worked through the weekend to help resolve
the investment bank’s woes, which were weighing on the broader financial
market. Early reports highlighted Bank of America and British bank Barclays PLC
as potential bidders. But sources told the Journal that such deals hinged on
the government providing financial support. By Sunday afternoon, it appeared
that Barclays - once seen as a leading bidder early Sunday - was walking away
from any deal, according to the Journal.
Treasury and Federal Reserve officials had made clear last week that they
didn’t want to orchestrate a government rescue that would involve government
funds - especially given that Lehman has access to emergency funds from the
Federal Reserve.
Such a government intervention would have likely been highly political given
that the government has already taken unprecedented steps this year to prevent
financial market woes from deepening even further. In March, the Treasury
Department and Federal Reserve helped orchestrate J.P. Morgan Chase & Co.’s
(JPM) takeover of Bear Stearns. In that deal, the government agreed to absorb
as much as $29 billion in losses. Just last week, the government announced a
hefty plan to takeover struggling mortgage giants Fannie Mae and Freddie Mac.
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