Asides

Fed Announces Moves to Put Band-Aid on Broken Credit Markets

By The Prince ⋅ March 11, 2008 ⋅  Email This Post ⋅  Print This Post ⋅ Post a comment

11 Mar 2008 - The Fed announced this morning that is was taking more steps to ease the credit crunch.  FT Alphaville announces here that "The credit market model is broken and must be fixed.”  The Federal Reserve ramped up efforts to provide more relief in a coordinated action with other central banks aimed at easing a global credit crises that threatens to push the U.S. economy into its first recession since 2001.  The Fed will make up to $200 billion in Treasury securities available to big Wall Street investment houses and banks.  The new action is designed to ensure that there is an ample supply of Treasury securities. With strains in financial markets, demand has grown for Treasury securities, considered the safest investment in the world because they are backed by the U.S. government.

The Fed also announced the creation of a new tool, called the Term Securities Lending Facility (TSLF), geared to provide primary dealers with 28-day loans of Treasury securities, rather than overnight loans.  Primary dealers could pledge other securities — including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannie Mae and Freddie Mac — as collateral for the loans of Treasury securities.  By allowing financial institutions to put up mortgage-backed securities — where there’s little appetite for them — in return for ultra-safe Treasury securities that are in high demand, the Fed hopes that will take pressure off financial companies and make them more inclined to lend.  Fed officials said that’s the first time they’ll be accepting mortgage-backed securities through this type of lending program.  Sounds like someone might of been listening to PIMCO’s Scott Simon blowing smoke yesterday.