Fed's $200 billion to rescue lenders
WASHINGTON -- Staring at spreading financial dangers, the Federal Reserve Tuesday announced a rescue package that would pour as much as $200 billion into banks and investment houses and allow them to put up risky home-loan packages as collateral.
The news lifted Wall Street to a huge rally. The Dow Jones industrial average shot up more than 416 points, its biggest one-day point gain since July 24, 2002.
The Federal Reserve's maneuver, coordinated with central banks overseas, was its latest effort to stem the global credit crisis and severe housing woes that threaten to bury the U.S. in its first recession since 2001. Fed Chairman Ben Bernanke and his colleagues have been stretching for new and imaginative ways to confront the situation.
They are hoping to bring relief where it is sorely needed: in the market for mortgage securities. Home loan financing has become much harder to get as nervous lenders have hunkered down.
"It is a highly significant move. The Fed is innovating in a way that is going to push liquidity directly into the mortgage markets, where it is most needed," said David Jones, president of DJM Advisors.
Assuming Tuesday's action helps to stabilize turbulent financial markets, that could reduce the chances the Fed will order a deep, three-quarters of a percentage point cut in its key interest rate next week to further encourage lending and other economic activity. An increasing number of economists now believe the Fed is more likely to cut rates by a half-point, though that could newly roil Wall Street.
The Federal Reserve announced it would allow squeezed financial institutions -- including big investment houses and banks -- to borrow up to $200 billion in super-safe Treasury securities by using some of their more risky investments as collateral.
The Fed announced the creation of a new Term Securities Lending Facility to provide financial institutions with 28-day loans of Treasury securities, rather than overnight loans. The institutions would pledge other securities -- including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannie Mae and Freddie Mac -- as collateral for the loans. Fed officials said it's the first time they'll be accepting mortgage-backed securities through this type of lending program.
"Firms that were having difficulty financing their mortgage positions have been thrown a lifeline," said Stephen Stanley, chief economist at RBS Greenwich Capital.
By allowing financial institutions to put up mortgage-backed securities -- for which there's little market appetite -- in return for safe securities that are in high demand, the Fed hopes to take pressure off financial companies and make them more inclined to lend to individuals and to businesses.
"Pressures in some of these markets have recently increased again," the Fed said in a statement. "We all continue to work together and will take appropriate steps to address those liquidity pressures." The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.
If it works, it should in time help to keep home loan rates down, especially on those backed by Fannie Mae and Freddie Mac, which are the few remaining sources of mortgage financing as credit has increasing dried up elsewhere, said Mark Zandi, chief economist at Moody's Economy.com.
"This will not turn the economy around or fix all the problems in the markets, but it should reduce the liquidity issue, at least for now," said Ian Shepherdson, chief economist at High Frequency Economics.