Fed Extends Emergency Loan Programs Through January

By Scott Lanman

July 30 (Bloomberg) -- The Federal Reserve extended its emergency lending programs to Wall Street firms through January after policy makers judged that markets are still too weak to go without a backstop from the central bank.

The Fed also plans to give securities dealers options for tapping one of the loan programs to ensure financing through key dates, such as the ends of quarters, when funding needs can jump. Commercial lenders will be able to borrow from the central bank for a longer period, and the Fed boosted its swap line with the European Central Bank.

Today's announcement reflects continued turmoil in financial markets, after three U.S. banks failed in as many weeks. Chairman Ben S. Bernanke and New York Fed President Timothy Geithner spearheaded the introduction of three lending programs since December as the credit crisis engulfed Wall Street and caused the collapse of Bear Stearns Cos.

``It's a recognition that there are still considerable strains in financial markets,'' said Brian Sack, a former Fed research manager who is now senior economist at Macroeconomic Advisers LLC in Washington. Sack added that today's decision bolstered his expectation for the Fed to hold off on raising interest rates until next year.

The Fed made today's announcement ``in light of continued fragile circumstances in financial markets,'' the central bank said today.

End of Programs

The Primary Dealer Credit Facility for direct loans to securities firms and the Term Securities Lending Facility for loans of Treasuries, both begun in March, ``would be withdrawn should the board determine that conditions in financial markets are no longer unusual and exigent,'' the Fed said in a statement.

Bernanke flagged the likelihood of the extension in a July 8 speech, saying the Fed is ``strongly committed'' to financial stability. The programs represent a provision of Fed credit to nonbanks unprecedented since the Great Depression.

The Fed will start auctions of options of as much as $50 billion in the TSLF on top of the $200 billion program, which loans Treasuries to securities firms in exchange for asset-backed securities and other collateral.

New York Fed officials plan to consult with the primary dealers of U.S. government bonds on the TSLF options program, the district bank said in a separate statement. The options plan is aimed at providing liquidity for two weeks or less surrounding key financing periods to be identified. Further details are planned on or before Aug. 8, the New York Fed said.

TAF Overhaul

The central bank also will start selling 84-day loans to commercial banks under the Term Auction Facility beginning next month, in addition to the sales of 28-day loans that have occurred since the program began in December. The biweekly sales will alternate between auctions of $75 billion in 28-day loans, and $25 billion in 84-day loans.

The Fed is planning the TAF sales to keep the program at $150 billion and released a schedule indicating it will remain at that size through November.

In related moves, the European Central Bank and Swiss National Bank are also extending their operations to include auctions of 84-day funds, the Fed said in a press release. The Federal Open Market Committee authorized an increase in the ECB's swap line with the Fed to $55 billion from $50 billion; the SNB's swap line is unchanged at $12 billion. The swaps are authorized through Jan. 30.

`Exigent Circumstances'

The Fed started the lending programs for investment banks under its authority to lend to nonbanks in ``unusual and exigent circumstances.'' Officials said at the time the Primary Dealer Credit Facility, which provides direct loans, would last for ``at least'' six months. The central bank had not previously given an end date for the TSLF.

The PDCF has shown a zero balance for four straight weeks. The loans, once as high as $37 billion, fell to zero after the Fed took on a portfolio of assets in June as part of a March agreement to ease Bear Stearns's acquisition by JPMorgan Chase & Co.

Geithner said last week that the PDCF and TSLF are still needed, citing ``exceptional'' tensions in financial markets. ``I don't think you can really judge the value today to the firms themselves, or the people that fund them, from looking at use day-by-day,'' Geithner told House lawmakers at a hearing in Washington.

Crunch Spreading

``I would be surprised if Jan. 30 marks the end of the measures,'' said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina. ``The credit crunch is very much with us and, if anything, spreading a bit to consumer borrowing.''

The Fed provides loans to commercial banks of as long as 90 days through the traditional discount window, which carries an interest rate of 2.25 percent, a quarter-point higher than the Fed's benchmark rate. Lending rose to a record daily average of $16.4 billion in the week ended July 24.

Economists compared the TSLF options program to a Fed initiative aimed at potential money shortages during the 2000 computer-system changeover. The Fed sold options on almost $500 billion of repurchase agreements for standby financing. None were exercised.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net