Fed enhances liquidity tools, backs money funds

CHICAGO (Reuters) - The U.S. Federal Reserve has unveiled a raft of measures in recent months to enhance liquidity tools aimed at easing strains in credit markets that have been hammered by losses from subprime mortgages.

SHORING UP MONEY MARKET MUTUAL FUNDS, MORTGAGE DEBT

The Fed on Sept 19 said it will open its discount window to financial institutions to allow them to buy certain assets from money market mutual funds. Non-recourse loans will be offered at the primary credit rate to finance purchases of asset-backed commercial paper (ABCP). This should help funds that hold such paper meet demands for redemptions by investors and boost liquidity in the ABCP markets and broader money markets. The move came in step with a $50 billion pledge from the U.S. Treasury to bank money market mutual funds.

The Fed also announced plans to purchase federal agency discount notes from primary dealers. Those notes are short-term debt obligations issued by Fannie Mae and Freddie Mac, which were seized by the government on September 7, and the Federal Home Loan Banks.

INCREASE IN SWAP LINE WITH OTHER CENTRAL BANKS

The Fed on Sept 18 made an extra $180 billion available to other major central banks to lend to their local commercial banks in a bid to get U.S. dollars circulating in overnight and short-term money markets. The move brought to $247 billion the total amount of dollars the Fed was providing to other central banks, an almost threefold increase. The increased swap lines amount to up to $110 billion with the ECB, up $55 billion, and up to $27 billion by the Swiss National Bank, up $15 billion. New swap facilities were authorized with the Bank of Japan for up to $60 billion; the Bank of England for up to $40 billion; and the Bank of Canada for up to $10 billion. The swap arrangements were authorized through January 2009.

PRIMARY DEALER CREDIT FACILITY (PDCF)

The Fed said that “in light of continued fragile circumstances in financial markets” it would extend this facility until January 30. The measure, introduced on March 16 for an initial six months, allows investment banks overnight access to the Fed’s discount window for lender-of-last-resort cash. This was the first time since the Great Depression that the Fed had lent money directly to investment banks it did not regulate, and the move highlighted the gravity of conditions facing the financial system around the time of the rescue of investment bank Bear Sterns by JPMorgan Chase. Loans under the PDCF are collateralized by investment-grade securities.

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U.S. launches all-out attack on credit crisis

By Patrick Rucker and Kevin Drawbaugh

WASHINGTON (Reuters) - The United States surged into action on Friday to launch an all-out attack against the worst financial crisis since the Great Depression, readying a plan to tap hundreds of billions of dollars in taxpayer funds to buy up toxic mortgage-related debt.

Capping a week that has reshaped Wall Street, Treasury Secretary Henry Paulson urged Congress to quickly agree on a program for huge purchases of bad debts held by banks and other financial institutions.

Lawmakers promised fast action on the plan, which two banking industry sources put in the $500 billion to $800 billion range.

Losses on mortgage-related debts have choked the financial system, forced lenders into bankruptcy and led the economy to what President George W. Bush called a “pivotal” moment.

“America’s economy is facing unprecedented challenges, and we are responding with unprecedented action,” Bush told reporters in the White House Rose Garden.

After having taken a series of other emergency steps that failed to erect a firewall against the spreading credit turmoil, U.S. authorities turned their attention to the underlying problem — the rising tide of bad mortgage debt.

Paulson offered few details on Treasury’s proposal but said he would work through the weekend and next week with Congress to get a program put in place. The proposal being sent to lawmakers would run only a few pages, a source said. A congressional aide said staff on Capitol Hill would be briefed on the plan on Saturday morning.

Rep. Steny Hoyer, the Democratic leader in the House of Representatives, said the chamber would likely take up a bill to implement the program early next week. House Speaker Nancy Pelosi said lawmakers would stay in town past their hoped-for adjournment next Friday if needed to pass it.

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