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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Paul Kern who wrote (85757)	8/30/2007 6:30:23 PM
From: Paul Kern	Respond to of 110194

Fed Discount Lending Averaged $1.3 Billion Last Week (Update1) By Craig Torres Aug. 30 (Bloomberg) -- Federal Reserve daily average discount window lending to banks rose by $115 million in the past week to an average $1.32 billion, as banks continued to use the central bank's liquidity backstop. The figure compares with $1.2 billion the previous week, which was the most since 2001 and stoked by a show of support from the four U.S. biggest lenders. The Fed's district banks in Richmond and New York showed the largest borrowing with outstanding loans, of $550 million each as of yesterday. ``There are very few people in the money markets that I talk to who think it is providing any relief beyond psychological relief,'' said Christopher Low, chief economist at FTN Financial in New York. ``It is too expensive. If a bank has decent credit, they can get a much lower rate in the market'' than the discount rate. The Fed is trying to restore confidence to markets by offering loans at half a percentage point lower than usual and letting firms support clients by channeling cash through their securities units. Credit markets remain under stress, as figures today showed the market for commercial paper, a key short-term financing tool, contracted for a third week. Fed officials cut the discount rate by half a percentage point to 5.75 percent on Aug. 17 and encouraged borrowing as a funding backstop for banks. The benchmark lending rate, the price banks pay for reserves in the market, remained unchanged at 5.25 percent. Drop in Balance The Fed had $1.1 billion of primary discount-window loans outstanding as of yesterday, down from $2 billion on Aug. 22. ``Banks are using the facility, but not in huge numbers,'' said Kathleen Stephansen, head of global economics at Credit Suisse in New York. ``It seems the asset-backed commercial paper market is still shrinking at a sizeable rate.'' Only institutions that take deposits can use the Fed's discount window, which excludes mortgage-finance companies that rely on capital markets to raise money. Last week, the four largest U.S. banks each borrowed $500 million from the Fed. Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. and Wachovia Corp. said they accessed the window five days after the Fed lowered the rate. The four companies, which have access to cheaper funds, said they were borrowing from the Fed as an incentive for others to do the same. The data today doesn't disclose who borrowed or whether these four banks have since repaid their loans. Special Exemption Fed officials last week gave Citigroup, Bank of America and JPMorgan an exemption to channel more funding to their securities units, in an effort to direct discount loans into capital markets, where it is needed. Wachovia was given a similar exemption on June 12. The New York Fed on Aug. 24 said it reminded banks they could use commercial paper of special-purpose vehicles as collateral for discount-window borrowing. Still, market liquidity remains patchy. Earlier today, the Fed reported that commercial paper outstanding fell 3.1 percent in the past week as investors shun debt secured by mortgages. Short-term debt maturing in 270 days or less fell $62.8 billion to a seasonally adjusted $1.98 trillion in the week ended yesterday, according to the Fed. Asset-backed commercial paper, which accounts for about half the market, fell 5.6 percent to $998 billion. ``Banks weren't funding this stuff when other people were,'' said Low. ``It is really hard to imagine that they are going to step in.'' One category of credit extended to firms with financing difficulties showed no borrowing this week versus an average of $85 million in the prior week, the discount-lending report showed. In the U.K., the Bank of England yesterday recently loaned 1.6 billion pounds ($3.2 billion) at its highest rate under a standby facility to provide banks with liquidity. To contact the reporters on this story: Vincent Del Giudice in Washington vdelgiudice@bloomberg.net Craig Torres in Washington at ctorres3@bloomberg.net Last Updated: August 30, 2007 17:55 EDT