Federal Reserve Announces Plan to Lend $200 Billion (Text)
2008-03-11 08:36 (New York)
2008-03-11 08:36 (New York)
By Christopher Anstey
March 11 (Bloomberg) -- Following is the text of the
statement released by the Federal Reserve today on plans to lend
up to $200 billion through a new liquidity tool.
Since the coordinated actions taken in December 2007, the G-10
central banks have continued to work together closely and to
consult regularly on liquidity pressures in funding markets.
Pressures in some of these markets have recently increased
again. We all continue to work together and will take
appropriate steps to address those liquidity pressures.
To that end, today the Bank of Canada, the Bank of England, the
European Central Bank, the Federal Reserve, and the Swiss
National Bank are announcing specific measures.
European Central Bank, the Federal Reserve, and the Swiss
National Bank are announcing specific measures.
Federal Reserve Actions
The Federal Reserve announced today an expansion of its
securities lending program. Under this new Term Securities
Lending Facility (TSLF), the Federal Reserve will lend up to
$200 billion of Treasury securities to primary dealers secured
for a term of 28 days (rather than overnight, as in the existing
program) by a pledge of other securities, including federal
agency debt, federal agency residential-mortgage-backed
securities (MBS), and non-agency AAA/Aaa-rated private-label
residential MBS. The TSLF is intended to promote liquidity in
the financing markets for Treasury and other collateral and thus
to foster the functioning of financial markets more generally.
As is the case with the current securities lending program,
securities will be made available through an auction process.
Auctions will be held on a weekly basis, beginning on March 27,
2008. The Federal Reserve will consult with primary dealers on
technical design features of the TSLF.
The Federal Reserve announced today an expansion of its
securities lending program. Under this new Term Securities
Lending Facility (TSLF), the Federal Reserve will lend up to
$200 billion of Treasury securities to primary dealers secured
for a term of 28 days (rather than overnight, as in the existing
program) by a pledge of other securities, including federal
agency debt, federal agency residential-mortgage-backed
securities (MBS), and non-agency AAA/Aaa-rated private-label
residential MBS. The TSLF is intended to promote liquidity in
the financing markets for Treasury and other collateral and thus
to foster the functioning of financial markets more generally.
As is the case with the current securities lending program,
securities will be made available through an auction process.
Auctions will be held on a weekly basis, beginning on March 27,
2008. The Federal Reserve will consult with primary dealers on
technical design features of the TSLF.
In addition, the Federal Open Market Committee has authorized
increases in its existing temporary reciprocal currency
arrangements (swap lines) with the European Central Bank (ECB)
and the Swiss National Bank (SNB). These arrangements will now
provide dollars in amounts of up to $30 billion and $6 billion
to the ECB and the SNB, respectively, representing increases of
$10 billion and $2 billion. The FOMC extended the term of these
swap lines through September 30, 2008.
increases in its existing temporary reciprocal currency
arrangements (swap lines) with the European Central Bank (ECB)
and the Swiss National Bank (SNB). These arrangements will now
provide dollars in amounts of up to $30 billion and $6 billion
to the ECB and the SNB, respectively, representing increases of
$10 billion and $2 billion. The FOMC extended the term of these
swap lines through September 30, 2008.
The actions announced today supplement the measures announced by
the Federal Reserve on Friday to boost the size of the Term
Auction Facility to $100 billion and to undertake a series of
term repurchase transactions that will cumulate to $100 billion.
the Federal Reserve on Friday to boost the size of the Term
Auction Facility to $100 billion and to undertake a series of
term repurchase transactions that will cumulate to $100 billion.
******************************
Insight: Fed May Resort to Other Tools to Fight Credit Crunch>
By Steven K. Beckner
Market News International - The Federal Reserve has by no means
exhausted its armory of tools for combatting the credit crunch, and
further, even more aggressive liquidity-providing measures have not been
ruled out.
There are a number of additional steps which the Fed and its
principal agent the New York Federal Reserve Bank could take, although
some would require the authorization of the Fed's policymaking Federal
Open Market Committee or the Fed's Board of Governors.
With the Fed having just announced on Friday a significant
expansion of its Term Auction Facility loans, as well as enlarged and
extended term repurchase agreements, it may be too soon to expect
further actions.
But as financial turmoil continues and credit constraints threaten
the economy, the Fed is in a state of almost hair-trigger readiness to
consider extraordinary, possibly even unprecedented, measures.
One possibility would be for the FOMC to use authority granted to
it by Congress to direct the New York Fed's open market desk to make
outright purchases of "agencies" -- the securities of "government
sponsored enterprises" (GSEs) such as Fannie Mae and Freddie Mac.
The New York Fed could, with a directive from the FOMC, buy the
agencies' own obligations and/or "agency pass-throughs" -- mortgage
backed securities guaranteed by Fannie and Freddie.
As part of its surprise announcement Friday morning, the Fed
announced it would be doing up to $100 billion in 28-day term, single
tranche repurchase agreements, and a senior Fed staffer indicated that
those repos would likely be slanted toward agencies and MBSs. And since
the New York Fed plans to offset those repos with other operations, the
net result will almost certainly be a reduction in the System Open
Market Account's holdings of Treasury securities relative to agencies
and MBS.
But what the Fed has not done up until now, although it has been
considered, is outright purchases of agencies and agency pass-throughs.
The FOMC's next scheduled meeting is on March 18, but it would not
have to wait that long if Chairman Ben Bernanke decides that such action
is needed. Last week, Bernanke hinted at a willingness to act quickly
and decisively when he said the crisis in the mortgage market calls for
"a vigorous response."
There are other steps that could be taken as well. Among other
things, it could further enlarge both the TAF auctions and the term
repos. Further, coordinated liquidity actions with other central banks,
beyond the reciprocal swaps already announced last December, could be
contemplated.
Or the Fed could "go nuclear" in a sense.
It has the authority to use its discount window -- or for that
matter the TAF -- to lend directly to non-banking companies -- to
securities firms or even commercial enterprises, but only if five
members of the Fed's Board of Governors determine that "unusual and
exigent circumstances" exist in financial markets.
As of now, there are only five sitting members of the Board,
including Gov. Randall Kroszner, so the vote would have to be unanimous.
(Kroszner's term expired at the end of January, but until he is replaced
he continues to sit on the Board with voting rights.)
Lending to non-banks is something the Fed has not done since it was
given that power during the Great Depression, and it is something the
Fed is not eager to do. Officials have said privately that that
particular application of the "lender of last resort" function is one
they would only resort to after other options have been exhausted.
However, the unprecedented may no longer be the unthinkable.
In recent weeks, Fed officials have expressed growing alarm at the
deterioration in financial market conditions. Once highly regarded firms
and municipalities have faced sharply widening credit spreads or have
been cut off from credit entirely as falling home prices have led to
falling securities prices and in turn falling collateral values.
A subdued Vice Chairman Donald Kohn, subjected to the most
withering line of questioning in years by the Senate Banking Committee,
admitted last week, "It looks very shaky -- every day there is some more
bad news." And indeed the size and dispersion of losses among major
banks, investment banks, hedge funds and others has caused some to say
that the United States is experiencing the worst ever seizing up of its
financial markets.
A day before the Fed made its dramatic TAF and repo announcements,
New York Federal Reserve Bank President Timothy Geithner warned the
credit crunch could have "an outsized adverse impact" on the economy and
said the Fed needed to move "proactively."
Geithner's comments were just the latest in a series of remarks by
Fed officials that betrayed a heightened sense of urgency which hinted
strongly not only at the emergency liquidity provisions but also at
additional, aggressive monetary easing -- and an extended period of low
rates.
Earlier, Cleveland Fed President Sandra Pianalto, an FOMC voting
member, said the economy is "highly vulnerable" to a "significant credit
crunch" and said the Fed has to be ready to act in an "aggressive and
timely manner."
In keeping with what Bernanke has called the Fed's need to be
"exceptionally alert and flexible," it has made a series of surprise,
intermeeting announcements -- beginning last Aug. 17 when it disowned
the tightening bias adopted just 10 days earlier and announced a halving
of the "penalty" spread on primary credit loans from the discount
window; on Dec. 12 when it announced creation of the TAF and
reactivation of currency swaps; again on Jan. 22, when the FOMC slashed
the federal funds rate 75 basis points, and most recently last Friday
with the enlargement of TAF auctions and term repos.
No one should be surprised if the Fed makes further "vigorous
responses."
By Steven K. Beckner
Market News International - The Federal Reserve has by no means
exhausted its armory of tools for combatting the credit crunch, and
further, even more aggressive liquidity-providing measures have not been
ruled out.
There are a number of additional steps which the Fed and its
principal agent the New York Federal Reserve Bank could take, although
some would require the authorization of the Fed's policymaking Federal
Open Market Committee or the Fed's Board of Governors.
With the Fed having just announced on Friday a significant
expansion of its Term Auction Facility loans, as well as enlarged and
extended term repurchase agreements, it may be too soon to expect
further actions.
But as financial turmoil continues and credit constraints threaten
the economy, the Fed is in a state of almost hair-trigger readiness to
consider extraordinary, possibly even unprecedented, measures.
One possibility would be for the FOMC to use authority granted to
it by Congress to direct the New York Fed's open market desk to make
outright purchases of "agencies" -- the securities of "government
sponsored enterprises" (GSEs) such as Fannie Mae and Freddie Mac.
The New York Fed could, with a directive from the FOMC, buy the
agencies' own obligations and/or "agency pass-throughs" -- mortgage
backed securities guaranteed by Fannie and Freddie.
As part of its surprise announcement Friday morning, the Fed
announced it would be doing up to $100 billion in 28-day term, single
tranche repurchase agreements, and a senior Fed staffer indicated that
those repos would likely be slanted toward agencies and MBSs. And since
the New York Fed plans to offset those repos with other operations, the
net result will almost certainly be a reduction in the System Open
Market Account's holdings of Treasury securities relative to agencies
and MBS.
But what the Fed has not done up until now, although it has been
considered, is outright purchases of agencies and agency pass-throughs.
The FOMC's next scheduled meeting is on March 18, but it would not
have to wait that long if Chairman Ben Bernanke decides that such action
is needed. Last week, Bernanke hinted at a willingness to act quickly
and decisively when he said the crisis in the mortgage market calls for
"a vigorous response."
There are other steps that could be taken as well. Among other
things, it could further enlarge both the TAF auctions and the term
repos. Further, coordinated liquidity actions with other central banks,
beyond the reciprocal swaps already announced last December, could be
contemplated.
Or the Fed could "go nuclear" in a sense.
It has the authority to use its discount window -- or for that
matter the TAF -- to lend directly to non-banking companies -- to
securities firms or even commercial enterprises, but only if five
members of the Fed's Board of Governors determine that "unusual and
exigent circumstances" exist in financial markets.
As of now, there are only five sitting members of the Board,
including Gov. Randall Kroszner, so the vote would have to be unanimous.
(Kroszner's term expired at the end of January, but until he is replaced
he continues to sit on the Board with voting rights.)
Lending to non-banks is something the Fed has not done since it was
given that power during the Great Depression, and it is something the
Fed is not eager to do. Officials have said privately that that
particular application of the "lender of last resort" function is one
they would only resort to after other options have been exhausted.
However, the unprecedented may no longer be the unthinkable.
In recent weeks, Fed officials have expressed growing alarm at the
deterioration in financial market conditions. Once highly regarded firms
and municipalities have faced sharply widening credit spreads or have
been cut off from credit entirely as falling home prices have led to
falling securities prices and in turn falling collateral values.
A subdued Vice Chairman Donald Kohn, subjected to the most
withering line of questioning in years by the Senate Banking Committee,
admitted last week, "It looks very shaky -- every day there is some more
bad news." And indeed the size and dispersion of losses among major
banks, investment banks, hedge funds and others has caused some to say
that the United States is experiencing the worst ever seizing up of its
financial markets.
A day before the Fed made its dramatic TAF and repo announcements,
New York Federal Reserve Bank President Timothy Geithner warned the
credit crunch could have "an outsized adverse impact" on the economy and
said the Fed needed to move "proactively."
Geithner's comments were just the latest in a series of remarks by
Fed officials that betrayed a heightened sense of urgency which hinted
strongly not only at the emergency liquidity provisions but also at
additional, aggressive monetary easing -- and an extended period of low
rates.
Earlier, Cleveland Fed President Sandra Pianalto, an FOMC voting
member, said the economy is "highly vulnerable" to a "significant credit
crunch" and said the Fed has to be ready to act in an "aggressive and
timely manner."
In keeping with what Bernanke has called the Fed's need to be
"exceptionally alert and flexible," it has made a series of surprise,
intermeeting announcements -- beginning last Aug. 17 when it disowned
the tightening bias adopted just 10 days earlier and announced a halving
of the "penalty" spread on primary credit loans from the discount
window; on Dec. 12 when it announced creation of the TAF and
reactivation of currency swaps; again on Jan. 22, when the FOMC slashed
the federal funds rate 75 basis points, and most recently last Friday
with the enlargement of TAF auctions and term repos.
No one should be surprised if the Fed makes further "vigorous
responses."
*****************************
From the Wall Street Journal-
Will Fed Try Something New to Aid Markets?
By DAVID WESSEL
March 11, 2008
With worsening strains in credit markets threatening to deepen and prolong an
incipient recession, analysts are speculating that the Federal Reserve may be
forced to consider more innovative responses -- perhaps buying mortgage-backed
securities directly.
"As credit stresses intensify, the possibility of unconventional policy options
by the Fed has gained considerable interest, said Michael Feroli of J.P. Morgan
Chase.
He said two options are garnering particular attention on Wall Street: direct
Fed lending to financial institutions other than banks and direct Fed purchases
of debt of Fannie Mae and Freddie Mac or mortgage-backed securities guaranteed
by the two shareholder-owned, government-sponsored mortgage companies.
Fed officials have said that, at times like these, the prudent course is to
evaluate all sorts of ideas, many of which may be rejected.
Since 1932, the Fed has had the authority to lend, against collateral, to
individuals, partnerships or corporations other than banks in "unusual and
exigent circumstances," subject to the vote of five members of the Board of
Governors. (The board has seven seats, but two are currently vacant.) This
power has never been used.
Mr. Feroli noted that Congress in 1966 gave the Fed temporary authority, made
permanent in 1979, to purchase obligations of government-sponsored enterprises,
such as Fannie Mae and Freddie Mac.
So far, the Fed hasn't purchased GSE obligations except in its short-term
repurchase operations. When the federal budget was in surplus, the Fed
considered outright purchases of GSE obligations, but judged against such a
move as it would reinforce the perception of an implicit government guarantee.
Last week, the Fed said it would lend banks $100 billion starting this week in
28-day loans through its new Term Auction Facility, at which banks can post a
wide variety of collateral, including mortgages, corporate loans and other
items that have become harder to sell in the open market. And it said it would
make money-market loans of as much as $100 billion to its network of 20 bond
dealers for 28 days, double the usual maximum term, and structure them to
encourage dealers to submit mortgage-backed securities guaranteed by Fannie and
Freddie Mac.
Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee,
has suggested creating a new government corporation that could buy
mortgage-backed securities.
But direct Fed purchases may be more practical and address current problems
"head on and immediately," David Ader, U.S. government bond strategist at RBS
Greenwich Capital, said in a note to clients.
"Plans like Dodd's or ideas like an explicit guaranty for the agencies are far
more political and will take a while to work out."
"If there is a message in the madness, it's this: The market is looking
elsewhere for a 'solution' to the broad mess that started in housing and will
presumably end with housing albeit with some big victims along the way," Mr.
Ader said. "Meaning someone or something will have to buy mortgage-backed
securities as a starter, to restore liquidity and confidence," he said. "We
emphasize that this is what the market is saying, not that it will happen or
won't."
The Fed's target for the federal funds rate is already down to 3% despite
rising inflation. The yield on two-year Treasury notes is a low 1.4%. And the
yield on five-year notes, Treasury's inflation-protected securities, is
negative, which means that investors accept a return lower than the eventual
rate of inflation. All this suggests the Fed already has its foot heavily on
the monetary gas pedal.
"The Fed has few traditional tools to use and, in the case of an interim ease
or 75 basis point [three-quarter percentage point] cut later this month, it had
better use them sparingly," Mr. Ader said.
Still, Wall Street Fed watchers increasingly anticipate that the Fed will cut
its target for the federal funds rate -- at which banks lending directly to
each other -- to 2.25% from 3% at its March 18 meeting. Fed officials haven't
been convinced that steep a cut is wise.
"The speed and agility with which public policy makers and private financial
institutions respond...will determine how quickly and how smoothly market
conditions return to normal," Timothy Geithner, president of the Federal
Reserve Bank of New York, the epicenter of the current crisis, said last
By DAVID WESSEL
March 11, 2008
With worsening strains in credit markets threatening to deepen and prolong an
incipient recession, analysts are speculating that the Federal Reserve may be
forced to consider more innovative responses -- perhaps buying mortgage-backed
securities directly.
"As credit stresses intensify, the possibility of unconventional policy options
by the Fed has gained considerable interest, said Michael Feroli of J.P. Morgan
Chase.
He said two options are garnering particular attention on Wall Street: direct
Fed lending to financial institutions other than banks and direct Fed purchases
of debt of Fannie Mae and Freddie Mac or mortgage-backed securities guaranteed
by the two shareholder-owned, government-sponsored mortgage companies.
Fed officials have said that, at times like these, the prudent course is to
evaluate all sorts of ideas, many of which may be rejected.
Since 1932, the Fed has had the authority to lend, against collateral, to
individuals, partnerships or corporations other than banks in "unusual and
exigent circumstances," subject to the vote of five members of the Board of
Governors. (The board has seven seats, but two are currently vacant.) This
power has never been used.
Mr. Feroli noted that Congress in 1966 gave the Fed temporary authority, made
permanent in 1979, to purchase obligations of government-sponsored enterprises,
such as Fannie Mae and Freddie Mac.
So far, the Fed hasn't purchased GSE obligations except in its short-term
repurchase operations. When the federal budget was in surplus, the Fed
considered outright purchases of GSE obligations, but judged against such a
move as it would reinforce the perception of an implicit government guarantee.
Last week, the Fed said it would lend banks $100 billion starting this week in
28-day loans through its new Term Auction Facility, at which banks can post a
wide variety of collateral, including mortgages, corporate loans and other
items that have become harder to sell in the open market. And it said it would
make money-market loans of as much as $100 billion to its network of 20 bond
dealers for 28 days, double the usual maximum term, and structure them to
encourage dealers to submit mortgage-backed securities guaranteed by Fannie and
Freddie Mac.
Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee,
has suggested creating a new government corporation that could buy
mortgage-backed securities.
But direct Fed purchases may be more practical and address current problems
"head on and immediately," David Ader, U.S. government bond strategist at RBS
Greenwich Capital, said in a note to clients.
"Plans like Dodd's or ideas like an explicit guaranty for the agencies are far
more political and will take a while to work out."
"If there is a message in the madness, it's this: The market is looking
elsewhere for a 'solution' to the broad mess that started in housing and will
presumably end with housing albeit with some big victims along the way," Mr.
Ader said. "Meaning someone or something will have to buy mortgage-backed
securities as a starter, to restore liquidity and confidence," he said. "We
emphasize that this is what the market is saying, not that it will happen or
won't."
The Fed's target for the federal funds rate is already down to 3% despite
rising inflation. The yield on two-year Treasury notes is a low 1.4%. And the
yield on five-year notes, Treasury's inflation-protected securities, is
negative, which means that investors accept a return lower than the eventual
rate of inflation. All this suggests the Fed already has its foot heavily on
the monetary gas pedal.
"The Fed has few traditional tools to use and, in the case of an interim ease
or 75 basis point [three-quarter percentage point] cut later this month, it had
better use them sparingly," Mr. Ader said.
Still, Wall Street Fed watchers increasingly anticipate that the Fed will cut
its target for the federal funds rate -- at which banks lending directly to
each other -- to 2.25% from 3% at its March 18 meeting. Fed officials haven't
been convinced that steep a cut is wise.
"The speed and agility with which public policy makers and private financial
institutions respond...will determine how quickly and how smoothly market
conditions return to normal," Timothy Geithner, president of the Federal
Reserve Bank of New York, the epicenter of the current crisis, said last
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