Banks, Wall Street firms increase borrowing from Fed in past week

WASHINGTON -- Banks and Wall Street firms ramped up borrowing from the Federal Reserve's emergency lending facility over the past week, a fresh sign of the credit stresses plaguing the country.

A Fed report released Thursday says commercial banks averaged $21.6 billion in daily borrowing over the past week. That compared with a daily average of $19.8 billion in the previous week.

For the week ending Sept. 17, Wall Street firms drew such loans averaging $20.3 billion. That step-up comes after six straight weeks where they didn't draw any loans. Their borrowing averaged as high as $38.1 billion a day over the course of a week in early April.

The report comes as Fed Chairman Ben Bernanke battles the worst financial crisis in decades. In the last few days, the American financial system has been badly shaken as bad bets on dodgy mortgage-backed securities claimed more Wall Street giants.

Scrambling to break the grip of a worsening global credit crisis, the Fed and foreign central banks stepped up action Thursday pumping as much as $180 billion in money markets overseas. At home the New York Fed acted to ease a spike in overnight lending rates by injecting $55 billion into the U.S. banking systsem.

President Bush canceled an out-of-town trip Thursday to stay in Washington and meet with his top economic advisers.

Bush held a 40-minute meeting with Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission chief Christopher Cox along with White House and Treasury Department aides.

Investment houses in March were given similar, emergency-loan privileges as commercial banks after a run on Bear Stearns pushed what was the nation's fifth-largest investment bank to the brink of bankruptcy. The situation raised fears that other Wall Street firms might be in jeopardy.

Bear Stearns was eventually taken over by JPMorgan Chase in a deal that involved the Fed's financial backing.

The identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay 2.25% in interest for the loans.

In the broadest use of the central bank's lending power since the 1930s, the Fed in March scrambled to avert a market meltdown by giving investment houses a place to go for emergency overnight loans. The Fed has since extended those loan privileges into next year.

The Fed's expanded lending programs, its involvement in the Bear Stearns rescue and the government's bailout of Fannie and Freddie have spurred concerns that these actions could put taxpayers on the hook for billion of dollars and encourage "moral hazard," where companies take on extra risks because they believe the government will come to their aid.

Separately, as part of efforts to relieve credit strains, the Fed auctioned nearly $25 billion in super-safe Treasury securities to investment companies Thursday. Bids were placed for $49.6 billion worth of the securities.

In exchange for the 28-day loans of Treasury securities, bidding companies can put up as collateral more risky investments. These include certain mortgage-backed securities and bonds secured by federally guaranteed student loans.

The auction program, which began March 27, is intended to make investment companies more inclined to lend to each other. A second goal is providing relief to the distressed market for mortgage-linked securities and for student loans.

The Fed actions come during an especially tumultuous week. The stock market has nosedived and investors have fled to super-safe investments like Treasury securities and gold. Briefly on Wednesday investors were willing to pay more for certain Treasury securities than they expected to get back when the investments matured, a rare event.

At the start of the week Lehman Brothers, the country's fourth-largest investment bank, filed for bankruptcy protection. A weakened Merrill Lynch, deciding it couldn't go it alone anymore, found help in the arms of Bank of America. Insurance giant American International Group was given an $85 billion emergency loan from the Fed in a deal allowing the government to take control of the company.

So far this year, 11 federally insured banks and thrifts have failed, compared with three last year. The country's largest thrift, Washington Mutual Inc., is faltering.