Fed takes bold steps to ease crisis
March 17, 2008
WASHINGTON (AP) - The Federal Reserve, acting urgently over the weekend
to stabilize financial markets, approved a cut in its emergency lending rate to
3.25 percent from 3.50 percent -- a new lending facility immediately available
Monday to Wall Street firms.
The central bank took the extremely rare step Sunday evening to calm
panicked markets by offering to provide cash to financially squeezed Wall Street
investment houses -- basically becoming a lender of last resort for them. The
move will allow big investment firms to quickly secure short-term loans.
"These steps will provide financial institutions with greater assurance of
access to funds," Federal Reserve Chairman Ben Bernanke told reporters in a
brief conference call Sunday evening.
The Fed acted just after JPMorgan Chase & Co. agreed to buy rival Bear
Stearns Cos. for $236.2 million in a deal that represents a stunning collapse
for one of the world's largest and most venerable investment houses. Just on
Friday the Fed had raced to provide emergency financing to cash-strapped Bear
Stearns through JPMorgan. Days earlier the Fed announced a set of other
unconventional steps to thaw out a credit market in danger of freezing shut.
The Fed's actions come as fears have spread that other financial houses
could also be on shaky ground.
"It seems as if Bernanke & Co. are pulling out all the stops to avoid a
serious financial market meltdown," Richard Yamarone, an economist at Argus
Research, said Sunday evening.
However on world financial markets, Asian stocks plunged Monday after the
JPMorgan and Fed announcements. Markets in Australia and New Zealand were also
off and European stocks fell in early trading.
Oil prices hit a record in Asian trading as the value of the dollar
continued its free fall and U.S. stock index futures were down sharply,
suggesting Wall Street would open lower after sinking Friday.
"There is persistent credit uncertainty. Market players have been repeatedly
let down which shows the subprime mortgage problems are so deep-rooted," said
Atsuji Ohara, global strategist of Shinko Securities in Tokyo.
President Bush has scheduled a White House meeting Monday afternoon with his
Working Group on Financial Markets, which includes Bernanke, Treasury Secretary
Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.
Paulson said Sunday, "I appreciate the additional actions taken this evening
by the Federal Reserve to enhance the stability, liquidity and orderliness of
our markets."
The new lending facility -- described as a cousin to the Fed's emergency
lending "discount window" for banks -- is geared to give major investment houses
a source of short-term cash on a regular basis -- if they need it.
That's important because those big investment houses have key roles in the
financial system and if one fails or is having difficulty it could put the whole
financial system in jeopardy, said Mark Zandi, chief economist at Moody's
Economy.com. These big investment houses have complex relationships with many
players in the system, including hedge funds, commercial banks and others.
The lending facility will be in place for at least six months and "may be
extended as conditions warrant," the Fed said. The interest rate will be 3.25
percent and a range of collateral -- including investment-grade mortgage backed
securities -- will be accepted to back the overnight loans.
The "discount" rate cut announced Sunday applies only to the short-term
loans that financial institutions get directly from the Federal Reserve. It
doesn't apply to individual borrowers.
The Fed's actions are the latest in a recent string of innovative steps to
deal with a worsening credit crisis that has unhinged Wall Street.
The action comes just two days before the central bank's scheduled meeting
on Tuesday, where another big cut to a key interest rate that affects millions
of people and businesses is expected to be ordered. That key rate is now at 3
percent and is expected to be cut by at least three-quarters of a percentage
point on Tuesday.
The Fed said in a statement that the steps are "designed to bolster market
liquidity and promote orderly market functioning ... essential for the promotion
of economic growth."
Even with the Fed's aggressive moves, economic and financial conditions keep
deteriorating. An increasing number of economists believe the country already
has slipped into its first recession since 2001. Many economists think that the
economy is shrinking now in the January-to-March quarter. The first government
figures on first-quarter economic activity will be released in late April.
The Fed on Sunday also approved the financing arrangement through which
JPMorgan will acquire Bear Stearns. JPMorgan said the Fed will provide special
financing for the deal. The central bank has agreed to fund up to $30 billion of
Bear Stearns' less liquid assets, according to JPMorgan.
AP Business writers Joe Bel Bruno and Madlen Read contributed to this report
from New York.
to stabilize financial markets, approved a cut in its emergency lending rate to
3.25 percent from 3.50 percent -- a new lending facility immediately available
Monday to Wall Street firms.
The central bank took the extremely rare step Sunday evening to calm
panicked markets by offering to provide cash to financially squeezed Wall Street
investment houses -- basically becoming a lender of last resort for them. The
move will allow big investment firms to quickly secure short-term loans.
"These steps will provide financial institutions with greater assurance of
access to funds," Federal Reserve Chairman Ben Bernanke told reporters in a
brief conference call Sunday evening.
The Fed acted just after JPMorgan Chase & Co. agreed to buy rival Bear
Stearns Cos. for $236.2 million in a deal that represents a stunning collapse
for one of the world's largest and most venerable investment houses. Just on
Friday the Fed had raced to provide emergency financing to cash-strapped Bear
Stearns through JPMorgan. Days earlier the Fed announced a set of other
unconventional steps to thaw out a credit market in danger of freezing shut.
The Fed's actions come as fears have spread that other financial houses
could also be on shaky ground.
"It seems as if Bernanke & Co. are pulling out all the stops to avoid a
serious financial market meltdown," Richard Yamarone, an economist at Argus
Research, said Sunday evening.
However on world financial markets, Asian stocks plunged Monday after the
JPMorgan and Fed announcements. Markets in Australia and New Zealand were also
off and European stocks fell in early trading.
Oil prices hit a record in Asian trading as the value of the dollar
continued its free fall and U.S. stock index futures were down sharply,
suggesting Wall Street would open lower after sinking Friday.
"There is persistent credit uncertainty. Market players have been repeatedly
let down which shows the subprime mortgage problems are so deep-rooted," said
Atsuji Ohara, global strategist of Shinko Securities in Tokyo.
President Bush has scheduled a White House meeting Monday afternoon with his
Working Group on Financial Markets, which includes Bernanke, Treasury Secretary
Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.
Paulson said Sunday, "I appreciate the additional actions taken this evening
by the Federal Reserve to enhance the stability, liquidity and orderliness of
our markets."
The new lending facility -- described as a cousin to the Fed's emergency
lending "discount window" for banks -- is geared to give major investment houses
a source of short-term cash on a regular basis -- if they need it.
That's important because those big investment houses have key roles in the
financial system and if one fails or is having difficulty it could put the whole
financial system in jeopardy, said Mark Zandi, chief economist at Moody's
Economy.com. These big investment houses have complex relationships with many
players in the system, including hedge funds, commercial banks and others.
The lending facility will be in place for at least six months and "may be
extended as conditions warrant," the Fed said. The interest rate will be 3.25
percent and a range of collateral -- including investment-grade mortgage backed
securities -- will be accepted to back the overnight loans.
The "discount" rate cut announced Sunday applies only to the short-term
loans that financial institutions get directly from the Federal Reserve. It
doesn't apply to individual borrowers.
The Fed's actions are the latest in a recent string of innovative steps to
deal with a worsening credit crisis that has unhinged Wall Street.
The action comes just two days before the central bank's scheduled meeting
on Tuesday, where another big cut to a key interest rate that affects millions
of people and businesses is expected to be ordered. That key rate is now at 3
percent and is expected to be cut by at least three-quarters of a percentage
point on Tuesday.
The Fed said in a statement that the steps are "designed to bolster market
liquidity and promote orderly market functioning ... essential for the promotion
of economic growth."
Even with the Fed's aggressive moves, economic and financial conditions keep
deteriorating. An increasing number of economists believe the country already
has slipped into its first recession since 2001. Many economists think that the
economy is shrinking now in the January-to-March quarter. The first government
figures on first-quarter economic activity will be released in late April.
The Fed on Sunday also approved the financing arrangement through which
JPMorgan will acquire Bear Stearns. JPMorgan said the Fed will provide special
financing for the deal. The central bank has agreed to fund up to $30 billion of
Bear Stearns' less liquid assets, according to JPMorgan.
AP Business writers Joe Bel Bruno and Madlen Read contributed to this report
from New York.
Labels: Fundamentals, Markets
