Fed Loans to Banks Almost Double to $98 Billion

By Craig Torres

Oct. 9 (Bloomberg) -- The Federal Reserve's direct loans to commercial banks almost doubled to a record $98.1 billion yesterday from a week before as the credit freeze sent money- market rates soaring.

Federal Reserve data released today in Washington showed that loans to banks through the so-called discount window climbed from $49.5 billion on Oct. 1.

Today's figures underscore the Fed's role in preventing a deeper meltdown as lenders hoard cash in the wake of bank failures around the world. Finance ministers and central bankers from the Group of Seven major industrial nations hold a meeting in Washington tomorrow and will discuss shoring up their national banking systems.

``Banks are relying more than ever on the Fed to get their liquidity, because borrowing from other banks has ground to a halt,'' said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis.

The London interbank offered rate, or Libor, for three- month loans rose to 4.75 percent today, the highest level since Dec. 28. Its premium over the Fed's benchmark rate -- its target rate for overnight loans between banks -- was a record.

The Fed's district bank of Richmond accounted for about half of the increase in loans to commercial banks. The region includes Wachovia Corp., the beleaguered bank that agreed this month to be taken over by Citigroup Inc. The Richmond Fed said Sept. 29 it was ready to ``provide liquidity as needed'' to support the sale of Wachovia.

The central bank said in a statement today that it will review a separate bid by Wells Fargo & Co. to buy Wachovia.

Lack of Trust

``The crux of the problem is counter-party risk,'' said Karl Haeling, head of strategic debt distribution at Landesbank Baden-Wuerttemberg in New York. ``All the liquidity the Fed has pumped in is not being recycled'' to other banks and borrowers, he added.

The U.S. government is planning to buy stakes in a wide range of banks within weeks as the credit freeze increasingly threatens to tip the U.S. economy into a deep recession. Treasury Secretary Henry Paulson and top aides are still considering options on how the purchases would work. The move would be a shift in emphasis in Paulson's original intention for the $700 billion bailout package passed by Congress last week, which focuses on purchases of bad assets from banks.

Borrowing by securities firms at the Fed totaled $123 billion, down from $146.6 billion, the central bank said today in its weekly report.

Emergency Lending

Under an emergency lending program to help money-market funds, banks borrowed $139.5 billion as of yesterday to buy commercial paper from such funds, down from $152.1 billion a week ago.

Fed loans to American International Group Inc., the largest U.S. insurer, rose to $70.3 billion from $61.2 billion. The Fed agreed Sept. 16 to rescue AIG with an $85 billion loan in return for an 80 percent stake for the U.S. government. The Fed also will provide as much as $37.8 billion in additional liquidity to AIG, the central bank said yesterday.

Global central banks have created several new tools for channeling liquidity into credit markets as lenders confront $592 billion in writedowns and losses from mortgages and related assets.

Central banks also staged coordinated rate cuts yesterday to support economic growth. The Fed reduced the federal funds rate to 1.5 percent and the discount rate, the charge for direct loans to banks and dealers, to 1.75 percent.

The European Central Bank, Bank of England, Bank of Canada and Sweden's Riksbank also reduced their benchmark rates by half a point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. China's central bank separately cut its key rate by 0.27 percentage point.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net