Fed to Help Meet Fund Redemptions, Buy Agency Debt

By Scott Lanman

Sept. 19 (Bloomberg) -- The Federal Reserve said it will lend to banks to meet demands for redemptions from money-market mutual funds and plans to buy agency debt from primary dealers to aid financial-market liquidity.

The Fed will extend loans to banks to purchase ``high- quality'' asset-backed commercial paper from money market funds, the Fed said in a statement in Washington. The loans will be at the discount rate, the Fed said. The rate is currently 2.25 percent. The Fed didn't provide a size for either initiative.

Investors pulled a record $89.2 billion from money-market funds on Sept. 17, according to data compiled by the Money Fund Report, a newsletter based in Westborough, Massachusetts. The U.S. Treasury separately said today it will use as much as $50 billion from the government's Exchange Stabilization Fund to temporarily protect investors from losses on money-market funds.

The central bank said it will buy short-term discount notes issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks ``to further support market functioning.'' The New York Fed will conduct the purchases of debt through ``competitive auctions'' over the ``next several weeks,'' the district bank said in a statement.

The actions came a day after Treasury Secretary Henry Paulson and Fed Chairman Ben S. Bernanke proposed moving troubled assets from the balance sheets of U.S. financial companies into a new institution, the most sweeping action aimed at ending the crisis.

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