Banking & Finance

Fed Adds Another $100B, Will Take 'Other' Mortgages In Rescue Package (GS, C, BAC, MER, MS, WB)

The Federal Reserve has just made an expansion of its securities lending program to add much more liquidity to the banking system, but the difference here is that this goes above and beyond the banking companies.

The Federal Reserve will now lend up to $200 Billion of Treasury securities to primary dealers secured for a term of 28 days instead of the traditional overnight package in the existing program by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS.  That last group is the critical issue because this will allow these institutions to partially put these to the government for a month, and that is at least a stretch into new assets it will accept.

Securities will be made available through a weekly auction process beginning on March 27, 2008.  The Federal Open Market Committee has also authorized increases in existing temporary reciprocal currency swap lines with the European Central Bank of $30 Billion and the Swiss National Bank of $6 Billion, representing increases of $10 billion and $2 billion respectively.

This supplements the measures announced by the Fed last Friday to boost the $100 billion package.  This also ties in with the Bank of Canada and the Bank of England, so you can count this as part of a globally coordinated package.  It is also meant to be a probable substitute to what many were hoping would be an inter-meeting emergency rate cut.

This is not just helping out the bank stocks.  Goldman Sachs (NYSE:GS), Citigroup (NYSE: C), Bank of America (NYSE: BAC), Merrill Lynch (NYSE: MER), Morgan Stanley (NYSE: MS) and Wachovia (NYSE: WB) are all indicating higher in pre-market trading.

S&P futures are up roughly 28 points and DJIA futures were up 200 after the news.

Jon C. Ogg
March 11, 2008