Fed Chairman Bernanke has announced plans to further ease the brokerage firms' money crises by extending the time in which they may borrow money from the Federal Reserve. Earlier this year, the "Fed window" was "opened" to brokerage firms and now those lending rights are being further expanded. Moreover, the Fed together with the Treasury Dept and others are working on plans to expand the power of the Federal Reserve. Finally, the Fed is proposing new rules to cover mortgage lenders.

Quote:
"We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end should the current unusual and exigent circumstances continue to prevail in dealer funding markets," Bernanke said in prepared remarks to a mortgage-lending forum in Arlington, Va.

The Fed's decision to act -- temporarily at least -- as a lender of last resort for Wall Street firms was made after a run on Bear Stearns pushed the investment bank to the brink of bankruptcy and raised fears that others might be in jeopardy. It was the broadest use of the Fed's lending powers since the 1930s.

Bear Stearns was eventually taken over by JPMorgan Chase & Co., with the Fed providing $28.82 billion in financial backing.

Those controversial decisions have drawn criticism from Democrats in Congress and elsewhere that the Fed is bailing out Wall Street and putting billions of taxpayer dollars at risk.

Bernanke, in appearances on Capitol Hill has said he doesn't believe taxpayers will suffer any losses.

In his speech Tuesday, the Fed chief defended those actions anew. If the Fed didn't intervene, he said, problems in financial markets would have snowballed, imperiling the country.

"Allowing Bear Stearns to fail so abruptly at a time when the financial markets were already under considerable stress would likely have had extremely adverse implications for the financial system and for the broader economy," Bernanke said to the mortgage forum, organized by the Federal Deposit Insurance Corp.

Here is a link to the entire article:
http://biz.yahoo.com/ap/080708/fed_credit_crisis.html?.v=1

Michael

Here is a quote from one of the 3 part series of articles from the Wall Street Journal about the Bear Stearns bail out:

"Directors authorized an emergency bankruptcy filing, but Mr. Schwartz still held out hope that a rescue could be arranged. A bankruptcy filing for Bear Stearns -- with its nearly 400 different subsidiaries -- would be immensely complicated. If the firm could make it through Friday, executives believed, they could come up with a more tenable fix to their problems.

Around midnight, Matt Zames, a senior J.P. Morgan trader, arrived with a team to look over Bear Stearns's books. The group appeared stunned by its financial position. "We need to talk to the Fed," said Mr. Zames. "Where are they?" Bear Stearns officials directed them down the hall to the firm's legal library, where officials from the New York Fed had been gathered for several hours.

Back in Mr. Molinaro's sixth-floor conference room, he and Mr. Schwartz, who hadn't had time for dinner, ate slices of cold pizza out of the box under a picture recalling flush times: A lithograph of The Wall Street Journal marked the day in 1999 that the Dow Jones Industrial Average hit 10,000 with the headline, "If This Is a Bubble, It Sure Is Hard to Pop."

By early Friday morning March 14, Bear Stearns's managers were running out of steam. No clear solution had yet emerged. It appeared to some that the firm might go under that day. Bear Stearns's financing team -- whose job it was to replenish the firm's operational funding by making new lending agreements each morning -- began dutifully dialing creditors. On the sixth floor, there was talk of ordering breakfast from Dunkin' Donuts.

At 5 a.m., Mr. Geithner convened a conference call with top government officials, including Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson Jr., to discuss the fallout from allowing the brokerage to collapse. They saw ripples spreading to thousands of firms world-wide that would involve trillions of dollars and take days to sort out. As the meeting wore on past the hour mark, Mr. Geithner warned that time was running out. Certain important credit markets were about to open. "What's it going to be?" he demanded.

At about 6:45 a.m., Bear Stearns officials received an email from Stephen Cutler, J.P. Morgan's general counsel. It was the draft of a news release announcing that the bank had agreed to provide Bear Stearns with financing "as necessary" for up to 28 days.
The money underwriting the rescue was coming from the Fed, which was also bearing the risk of the loan. It was the first time since the Great Depression that the Fed had made a loan like this to an entity other than a bank.

Here is a link to these articles:
http://online.wsj.com/article/SB121193290927324603.html?mod=sphere_ts&mod=sphere_wd

Michael

The Federal Reserve continues its program of injecting money into the economy. This is accomplished in several ways. The first way referred to in the quotes below gets money to banks with the idea that the banks will then loan it out to customers. Of course, that may or may not be the result. That is, no one can make the customers borrow money if their mood has soured to the point that they do not want more debt.

Also, the banks themselves may be so concerned about the bank regulators and how they categorize loans, that they may have tightened up on lending to the point that whether they have the money to lend or not, no one can qualify for any new loans. Finally, the money meant to be the source of new loans may instead be covering losses on old loans. But nonetheless, the Fed has planned 3 more auctions of debt.

"The Fed said it will conduct three auctions in June, with each one making $75 billion available in short-term cash loans. Banks can bid for a slice of the available funds. It would mark the latest round in a program that the Fed launched in December to help banks overcome credit problems so they will keep lending to customers.
…
Also Thursday, the Fed -- in a separate program -- auctioned $16.4 billion in safe Treasury securities to investment firms, another effort aimed at easing credit problems. That operation drew bids less than the $25 billion being made available, which could be viewed as a sign of some improvement in credit conditions.

In exchange for the 28-day loans of Treasury securities, bidding firms put up as collateral more risky investments, including certain shunned mortgage -backed securities and bonds backed by federally guaranteed student loans. This program began March 27."

Here is a link to the entire article:
http://biz.yahoo.com/ap/080529/fed_credit_crisis.html?.v=3

Michael

In order to avoid a widening of the banking/credit crisis, the Federal Reserve has opened the window wide. That is, unprecedented amounts of money have been loaned to banks as well as (in a recent move) to brokerage firms. So, while the official word is that all is well and things are about to turn around, the amount of money which banks and brokerage firms are borrowing in order to survive is skyrocketing. These amounts do not include separate one time "facilities" used, for example, to finance the purchase of Bear Stearns by JP Morgan Chase.

Quote:
The Federal Reserve's direct loans of cash to commercial banks climbed to the highest level on record in the past week as money-losing lenders increasingly turn to the central bank for funds.

Funds provided through the so-called discount window for banks rose by $2.8 billion to a daily average of $14.4 billion in the week to May 14, the central bank said today in Washington. Separately, the Fed's loans to Wall Street bond dealers rose by $75 million to $16.6 billion.

…
Bear Stearns Cos. had borrowed $32.5 billion from the Fed as of March 21, according to a JPMorgan Chase & Co. regulatory filing on April 11. The Fed provided $29 billion of financing to secure JPMorgan's takeover of the investment bank in March.

Bank of America Corp. Chief Executive Officer Kenneth Lewis urged policy makers today to choose between bailing out Wall Street investment banks or letting the ``hotbeds of risky financial innovation'' fail as the market dictates.

``I understand the argument for opening up the Fed's discount window to investment banks in this environment,'' Lewis said in a speech today at New York University's Stern School of Business. ``But I'd also say that providing a public backstop to an inherently risky business that is not required to backstop itself is a tough sell for taxpayers.''

Here is a link to the whole article:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aur2QcWbKf2U&refer=home

Michael