Elections Today
- Pennsylvania
Recent Projections
| State | Candidate | Delegates |
|---|---|---|
 Donald Trump | ||
Pennsylvania |  Joe Biden |
The Fed's Three Surprising Fixes
Will the Fed's historic decisions prevent another Bear Stearns-style panic?
March 17, 2008 — -- The Federal Reserve made several surprising and unprecedented moves Sunday evening that, in the words of Federal Reserve chairman Ben Bernanke, are meant to ensure "well-functioning markets."
The Federal Reserve lowered an interest rate and it allowed investment banks to get loans from the Federal Reserve. Those moves came as the Fed helped JP Morgan Chase take over Bear Stearns by assuming the troubled bank's $30 billion portfolio.
At the request of the Federal Reserve Bank of New York, the Federal Reserve Board unanimously voted to lower the "discount rate" from 3.50 percent to 3.25 percent.
This is the interest rate charged to depository institutions like banks for loans in return for collateral that the bank provides to the Fed. In the past, these were overnight loans, but in September, the loans were extended to 30 days.
On Sunday, the Fed not only lowered the interest rate, it extended the loan period to 90 days.
But by far the most significant action taken by the Fed was to open the discount window to what are called primary dealers, institutions that are not traditional banks. This category includes investment banks like Goldman Sachs and Morgan Stanley, and if it was still around, Bear Stearns.
These investment banks can now go directly to the Fed, offer up a broad range of collateral -- much broader than previously accepted -- and get an overnight loan for 3.25 percent.
The collateral accepted by the Fed can be any investment grade security. That means it could take on those mortgage loans that no one else wants.
This special facility for the primary dealers -- the Primary Dealer Credit Facility -- starts today and will last at least six months.
The Fed says it will make loans based on the current value of whatever is being offered as collateral and that it will impose an even lower price in order to get a loan, referred to as a "haircut."
Why would it do this?
Related Stories
ABC News Live