Fed Commercial-Paper Purchases Rise; Cash Loans Drop

By Scott Lanman

Nov. 20 (Bloomberg) -- The Federal Reserve expanded commercial paper purchases from U.S. corporations, increasing holdings by $13.5 billion, or 5.2 percent, while cash borrowing by banks and Wall Street bond dealers declined.

The central bank increased its holdings to $272 billion in the week ended yesterday, after a $13.9 billion increase the previous week. The Fed has extended $270.3 billion in loans for the debt, the Fed said today in a weekly report on its balance sheet.

The commercial-paper purchases and other loan programs totaling more than $1 trillion are aimed at sustaining financial companies through a credit crisis that's led to $966 billion in writedowns and losses since the start of 2007. Interest-rate cuts and emergency loans by the Fed failed to prevent the U.S. economy from sliding into a recession.

Separately, direct loans to commercial banks fell to $92.6 billion from $99.2 billion as of yesterday, while cash borrowing by securities firms totaled $46.6 billion, down from $56.7 billion the previous Wednesday. The loans are at the discount rate, currently 1.25 percent.

The outstanding balance of American International Group Inc.'s $122.8 billion rescue credit line stood at $87.4 billion yesterday, up from $83.6 billion last week.

The company got an expanded $152.5 billion bailout from the government on Nov. 10, which hasn't taken full effect yet. The Treasury will invest $40 billion in funds from the $700 billion Congress provided in bank-rescue legislation, while the Fed's share of the bailout will fall to $112.5 billion.

Creditor Bailout

The Fed first provided an $85 billion loan Sept. 16 in a bailout of AIG's creditors, then authorized another $37.8 billion on Oct. 8. Those loans will be replaced by the ones announced Nov. 10. The insurer also got access to as much as $20.9 billion from the commercial paper program, AIG said this month in a regulatory filing.

Central bankers are flooding financial institutions with temporary loans in an effort to overcome cash hoarding by banks. The loans have enlarged the Fed's balance sheet to $2.19 trillion in total assets, up $1.29 trillion from a year earlier.

Bloomberg LP, parent of Bloomberg News, filed a lawsuit against the Fed Nov. 7 seeking disclosure of securities the central bank is accepting as collateral for the loans to banks and bond dealers.

Peak Level

In addition to the CPFF, the Fed started a separate program in September to lend to banks for purchases of asset-backed commercial paper from money-market mutual funds. Loans under that program totaled $61.9 billion as of yesterday, down from $76.5 billion a week earlier and a peak of $152.1 billion on Oct. 1.

The Fed invoked emergency powers on Oct. 7 to start the purchases of commercial paper as the credit freeze threatened the financing tool supporting daily cash needs for American businesses. The Treasury Department deposited $50 billion with the Fed to begin the program, which started Oct. 27.

American Express Co., the biggest U.S. credit-card company, and General Electric Co. are among companies that sold debt to the Fed.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars, fell to 2.15 percent today from 2.17 percent yesterday and is down from 4.82 percent on Oct. 10, according to British Bankers' Association data. That means banks can still get cheaper loans directly from the Fed than the private market.

Lowest Level

U.S. commercial paper outstanding rose for a fourth straight week, increasing $11.1 billion, or 0.7 percent during the week ended Nov. 19, to a seasonally adjusted $1.61 trillion, the Fed said earlier today. The Fed has cut the rate it will accept to buy the debt to the lowest since its program started.

The central bank cut the target for the federal funds rate to 1 percent Oct. 29, helping lower overall money market rates. More than half of 57 economists surveyed by Bloomberg News expect at least another quarter point reduction when Fed officials meet next month.

Next week's report will be the first to reflect a third Fed program involving commercial-paper purchases, the Money Market Investor Funding Facility, will begin Nov. 24. Under that program, the Fed will lend up to $540 billion to five special funds to buy certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or fewer.

Another Fed unit, Maiden Lane LLC, holds the $26.9 billion of assets the central bank took on in its rescue of Bear Stearns Cos.

No Formal Target

The Fed said the M2 money supply rose by $29.6 billion in the week ended Nov. 10. That left M2 growing at an annual rate of 6.4 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.

During the latest reporting week, M1 declined by $21.1 billion. Over the past 52 weeks, M1 increased 6.1 percent. The Fed no longer publishes figures for M3.

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