Fed Expands Loan Facilities; Banks Establish $70 Billion Fund

Updating an earlier email subscriber exclusive sent out last Friday, ten banks said Monday that they’ve established a $70 billion borrowing facility to bolster liquidity among a battered financial market in the wake of the failure of Lehman Brothers Holdings Inc. (LEH) and the sale of Merrill Lynch & Co. (MER) to Bank of America Corp. (BAC). According to Reuters, which reported on the new facility, each bank contributed $7 billion for the collateralized facility, and any one of the 10 banks would be permitted to borrow up to one-third of the total facility. The self-funded borrowing facility is designed to help struggling banks deal with a growing financial crisis, although most analysts that spoke with HW viewed it, as one analyst described it, “throwing a stick into a hurricane.” The 10 banks involved are Bank of America Corp., Barclays Plc, Citigroup Inc. (C), Credit Suisse Group (CS), Deutsche Bank AG (DB), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Merrill Lynch & Co., Morgan Stanley (MS) and UBS AG (UBS). The move by the banks to establish the fund comes in tandem with an announcement by the U.S. central bank Sunday evening that will see it both loosen and widen access to the Fed’s discount window via its Primary Dealer Credit Facility and Term Securities Lending Facility. “In close collaboration with the Treasury and the Securities and Exchange Commission, we have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses,” said Federal Reserve Board Chairman Ben Bernanke in a press statement on Sunday. “The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets.” Treasury secretary Henry Paulson clearly sent a message that regulators are looking forward from the current mess. “Today we are looking forward,” he said, bluntly, in a press statement. “This weekend’s discussions made clear that both market participants and regulators in this country and abroad recognize the need to support market stability and remove uncertainty as they address current challenges.” The Fed’s expansion of its PDCF/TSLF programs are clearly central to the effort; the Fed said it would expand the PDCF to accept equities and that the TSLF would now accept all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged to under the TSLF. The Fed also adopted an interim final rule that will allow all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. The exception will expire on January 30, 2009, officials said. Despite the moves, some analysts told HW that the expanded facilities may mean little for institutions whose problems lie in insolvency, not liquidity. “It’s one thing to say ‘we need cash to ride out the storm,'” said one analyst, who asked not to be named. “It’s another entirely to say ‘the storm took out everyone who could have paid us back.’ We’ll find out how many of the latter exist soon enough.” Disclosure: The author held no relevant positions when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.