WASHINGTON: The Federal Reserve said Wednesday that it was extending the time frame for its emergency borrowing program for Wall Street firms and was taking other steps to ease a severe credit crunch that has hobbled the U.S. economy.
On the other side of the Atlantic, the European Central Bank and the Swiss National Bank announced that they would make billions of U.S. dollars available to non-U.S. banks still starving for the currency.
The Fed, meanwhile, said the program, under which investment houses could tap the central bank for a quick source of cash, would now be available through Jan 30. Originally the program, begun March 17, was to end by mid-September.
Another program, in which investment firms can temporarily swap more risky investments for Treasury securities also will continue through Jan. 30, the Fed said. And, it also will let commercial banks, in a separate program, bid on cash loans that last longer - for 84 days - in addition to the 28-day loans now available.
The Fed said it was taking these steps "in light of continued fragile circumstances in financial markets." The Fed said that the emergency borrowing program for investment houses and the program that lets investment firms temporarily borrow Treasury securities would be withdrawn, should the Fed determine that conditions in financial markets were "no longer unusual and exigent."
The smooth flow of credit is like oxygen for the economy. It permits people to finance big-ticket purchases, like homes and cars, and help businesses expand operations and hire workers. Fallout from a trio of crises - housing, credit and financial - have badly bruised the U.S. economy. Growth has slowed and companies have cut hundreds of thousands of jobs.
Investment houses were given similar emergency loan privileges as commercial banks after a run on Bear Stearns pushed the investment bank to the brink of bankruptcy. The situation raised fears that other Wall Street firms might be in jeopardy.
Under the swap program, in force since March 27, investment firms bidding on the Treasury securities can put up as collateral more risky investments. These include certain mortgage-backed securities and bonds secured by federally guaranteed student loans.
The program is intended to make investment companies more inclined to lend to each other. A second goal is providing relief to the distressed market for mortgage-linked securities and for student loans.
The Fed also said it would let Wall Street firms place bids on an option to borrow the Treasury securities. Up to $50 billion would be made available for this.
The ECB and the Swiss National Bank informed the Fed that they also would make available to their banks similar 84-day cash loans. To help on this front, the Fed raised its credit line with the ECB by $5 billion to $55 billion.
The ECB said it would increase its dollar offering to $50 billion in the latest series of operations. The bank will make 84-day loans available starting Aug. 8 and said operations would continue as long as "needed in view of the prevailing market conditions." The Swiss National Bank said it would start making 84-day loans available Aug. 12.
Short-sell curbs lengthenedThe Securities and Exchange Commission on Wednesday extended an emergency rule through Aug. 12 aimed at curbing abusive short-selling in the stocks of 19 financial firms, including the mortgage giants Freddie Mac and Fannie Mae, Reuters reported from Washington.
The rule is part of an agency crackdown on possible market manipulation that some blame for steep declines in the shares of financial companies.
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