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Banks borrow record amount from Fed & First Into Recession, California Shows Possible Future for U.S. & Rate cut loosens credit only at the margins
Banks borrow record amount from Fed
By JEANNINE AVERSA, AP Economics Writer
Thu Oct 9, 7:37 PM ET
Banks borrowed in record amounts from the Federal Reserve's emergency lending facility over the past week, while investment banks drew loans at a brisk — though slightly lower — pace, fresh proof of the credit problems gripping the country.
The Fed's report released Thursday said commercial banks averaged a record $75 billion in daily borrowing over the past week. That surpassed the old record — a daily average of $44.5 billion — logged in the previous week. On Wednesday alone, $98 billion was drawn, an all-time high.
For the week ending Wednesday, investment firms drew $134 billion. That was down from a record $147.7 billion in the previous week. This category was broadened last week to include any loans that were made to the U.S. and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch.
The Fed report also showed that over the last week $145.9 billion worth of loans were made to money market mutual funds — via banks — to help the funds, which have been under pressure as skittish investors demand withdrawals.
Squeezed banks and investment firms are borrowing from the Fed because they can't get money elsewhere. Skittish investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lend it to each other or customers.
The report also showed that the Fed has loaned $70.3 billion to insurance giant American International Group. In mid-September, the Fed said it would provide the troubled company a two-year, $85 billion loan. On Wednesday the central bank said it would loan the company an additional $37.8 billion.
The report comes as Washington policymakers battle the worst financial crisis since the stock market crash of 1929.
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 identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay 1.75 percent in interest for the loans.
Since the Bear Stearns debacle in March, the Fed has taken a series of radical, unprecedented steps to get lending — the economy's oxygen — flowing more freely again. It has repeatedly tapped its Depression-era authority to be a lender of last resort not only to financial institutions but also to other types of companies.
Critics worry that the Fed's actions could put billions of taxpayers' dollars at risk.
Separately, as part of efforts to relieve credit strains, the Fed auctioned $37.5 billion in super-safe Treasury securities to investment companies Thursday. Bids were placed for $62.78 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.
All the Fed's extraordinary efforts, however, haven't been able to halt the crisis or prevent a seismic shake-up on Wall Street. In recent weeks, 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. AIG was thrown a financial lifeline. And, the last two investment houses — Goldman Sachs and Morgan Stanley — decided to convert themselves into commercial banks to better weather the financial storms.
Meanwhile, 13 banks have failed this year, compared with three last year.
Stocks have tumbled, too. The Dow suffered a triple-digit loss for the sixth day in a row Thursday, a first, and the average dropped for the seventh day in a row. The index lost 679 points to close below 9,000 for the first time in over five years.
First Into Recession, California Shows Possible Future for U.S.
Here's the latest trend that started in California and is spreading to the rest of the country: recession.
It's all but certain the U.S. economy is in a recession, as falling home prices and Wall Street turmoil have put the brakes on consumer spending and stoked unemployment. But California got there first. Now, the state provides a template of how a broad U.S. downturn could look.
With its export businesses, manufacturing sector, professional services and big retail employers, California looks like many other U.S. states, only more so. California's $1.8 trillion economy -- twice the size of India's and accounting ...
Rate cut loosens credit only at the margins
By MADLEN READ, AP Business Writer
Thu Oct 9, 7:13 PM ET
The credit markets might not be quite as squeezed as they have been recently, thanks to the Federal Reserve's interest rate cut. But they're hardly back to normal.
In two signs of continued strain, a key bank-to-bank lending rate rose Thursday and the amount of commercial paper in the market fell for the fourth straight week to 15 percent below the level before the investment bank Lehman Brothers Holdings Inc. filed for bankruptcy.
While lending doesn't appear to be in the same seized-up state as last week, the year-end could prove a difficult time for funding as banks and other institutions try to get their books in order, said Kim Rupert, managing director of global fixed income analysis at Action Economics.
"It looks like the central bank's actions are starting to help marginally improve confidence enough where safe haven isn't the only thing on investors' minds," Rupert said. "But it's only one small step so far. It's going to be a very jagged type of improvement. There's still a lot of factors that are going to keep anxiety at elevated levels."
The London Interbank Offered Rate, or Libor, for three-month dollar loans rose to 4.75 percent from 4.52 percent on Wednesday. Just a month ago, three-month Libor was at 2.81 percent.
That stubbornly high Libor is just one of the reasons that the stock market has been tumbling. When banks are loath to lend, a weak economy has a hard time bouncing back. The Dow Jones industrial average sank nearly 679 points on Thursday to the lowest level in five years.
Libor's sharp jump over the past month is worrisome because consumer loans such as adjustable-rate mortgages are tied to Libor — meaning that those mortgages could become harder to pay. Citigroup analysts recently predicted that continued stress in Libor will result in a 10 percent jump in defaults for outstanding non-delinquent adjustable-rate mortgages when they reset.
Libor for overnight dollar loans slipped to 5.09 percent Thursday from 5.38 percent, but still remains extremely high — especially compared to the target Fed funds rate, a key overnight lending rate that the Federal Reserve slashed Wednesday by a half-point to 1.5 percent.
Meanwhile, commercial paper outstanding dropped for the fourth straight week. Commercial paper is a type of debt companies sell to get short-term cash, often so that they can maintain their inventories and payrolls. The Fed said commercial paper outstanding fell by $56.4 billion to a seasonally-adjusted $1.55 trillion in the week ended Oct. 8 — that's down from $1.82 billion on Sept. 10, and down 30 percent from the peak of $2.2 trillion in the summer of 2007.
As companies have a harder time getting financing, businesses and municipalities have been taking action to try to adapt. Connecticut's governor is requesting that banks statewide to contribute at least $1 million each to a lending pool for small businesses. And Apollo Management LP is offering a $540 million capital infusion to its affiliate Hexion Specialty Chemicals to help Hexion close its takeover of Huntsman Corp; Hexion said it doubted that Deutsche Bank AG and Credit Suisse Group AG would provide financing.
Automakers and dealers have been especially hard hit by the double-whammy of a slow economy and squeezed credit. Standard & Poor's Ratings Services on Thursday put General Motors Corp. and its 49 percent-owned finance affiliate GMAC LLC on negative credit watch. It also put Ford Motor Co. on negative credit watch. That means there is a 50 percent chance that S&P will lower the ratings on these companies in the next three months; S&P said that while their liquidity is adequate now, deteriorating conditions could challenge their liquidity in 2009.
There were a few promising signs that the stranglehold on the credit markets is starting to loosen, at least in some areas.
One was that the recent drop in commercial paper was smaller than the $94.9 billion decline in the previous week, and the $61 billion decrease in the week ended Sept. 24. And last week's decline occurred in financial companies' commercial paper and asset-backed commercial paper — commercial paper issued by non-financial companies edged higher overall.
"We're still seeing a lot of investments in overnights and very short maturities," said Alex Roever, a fixed-income analyst with JPMorgan. "The really strong financial and non-financial names — top tier corporations — are seeing stronger interest in one-month, two-month, three-month paper. It's definitely better than where it was a week or so ago."
Moreover, following the Fed's Tuesday decision to buy commercial paper and Wednesday's move to slash the key interest rate, the rates on certain overnight commercial paper fell by 1.15 percentage points on Thursday to 2.35 percent, noted Miller Tabak & Co. analyst Tony Crescenzi.
And IBM Corp. was able to sell $3.9 billion in longer-term bonds on the market Thursday after posting better-than-expected profits.
But investors are still anxious. The yield on the three-month Treasury bill initially edged up on Thursday, but then slipped to 0.58 percent from 0.63 percent late Wednesday. That suggests that demand for T-bills, regarded by investors as the safest assets around, remains high. The discount rate was also 0.58 percent.
Longer-term Treasury yields were mixed after the stock market's plunge.
In late trading, the 2-year Treasury note rose 1/32 to 100 28/32 and yielded 1.55 percent, down from 1.56 percent late Wednesday. The 10-year note fell 28/32 to 101 30/32 and yielded 3.76 percent, up from 3.65 percent. The 30-year bond fell 1 25/32 to 106 31/32 and yielded 4.09 percent, up from 4.05 percent.
By JEANNINE AVERSA, AP Economics Writer
Thu Oct 9, 7:37 PM ET
Banks borrowed in record amounts from the Federal Reserve's emergency lending facility over the past week, while investment banks drew loans at a brisk — though slightly lower — pace, fresh proof of the credit problems gripping the country.
The Fed's report released Thursday said commercial banks averaged a record $75 billion in daily borrowing over the past week. That surpassed the old record — a daily average of $44.5 billion — logged in the previous week. On Wednesday alone, $98 billion was drawn, an all-time high.
For the week ending Wednesday, investment firms drew $134 billion. That was down from a record $147.7 billion in the previous week. This category was broadened last week to include any loans that were made to the U.S. and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch.
The Fed report also showed that over the last week $145.9 billion worth of loans were made to money market mutual funds — via banks — to help the funds, which have been under pressure as skittish investors demand withdrawals.
Squeezed banks and investment firms are borrowing from the Fed because they can't get money elsewhere. Skittish investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lend it to each other or customers.
The report also showed that the Fed has loaned $70.3 billion to insurance giant American International Group. In mid-September, the Fed said it would provide the troubled company a two-year, $85 billion loan. On Wednesday the central bank said it would loan the company an additional $37.8 billion.
The report comes as Washington policymakers battle the worst financial crisis since the stock market crash of 1929.
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 identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay 1.75 percent in interest for the loans.
Since the Bear Stearns debacle in March, the Fed has taken a series of radical, unprecedented steps to get lending — the economy's oxygen — flowing more freely again. It has repeatedly tapped its Depression-era authority to be a lender of last resort not only to financial institutions but also to other types of companies.
Critics worry that the Fed's actions could put billions of taxpayers' dollars at risk.
Separately, as part of efforts to relieve credit strains, the Fed auctioned $37.5 billion in super-safe Treasury securities to investment companies Thursday. Bids were placed for $62.78 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.
All the Fed's extraordinary efforts, however, haven't been able to halt the crisis or prevent a seismic shake-up on Wall Street. In recent weeks, 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. AIG was thrown a financial lifeline. And, the last two investment houses — Goldman Sachs and Morgan Stanley — decided to convert themselves into commercial banks to better weather the financial storms.
Meanwhile, 13 banks have failed this year, compared with three last year.
Stocks have tumbled, too. The Dow suffered a triple-digit loss for the sixth day in a row Thursday, a first, and the average dropped for the seventh day in a row. The index lost 679 points to close below 9,000 for the first time in over five years.
First Into Recession, California Shows Possible Future for U.S.
Here's the latest trend that started in California and is spreading to the rest of the country: recession.
It's all but certain the U.S. economy is in a recession, as falling home prices and Wall Street turmoil have put the brakes on consumer spending and stoked unemployment. But California got there first. Now, the state provides a template of how a broad U.S. downturn could look.
With its export businesses, manufacturing sector, professional services and big retail employers, California looks like many other U.S. states, only more so. California's $1.8 trillion economy -- twice the size of India's and accounting ...
Rate cut loosens credit only at the margins
By MADLEN READ, AP Business Writer
Thu Oct 9, 7:13 PM ET
The credit markets might not be quite as squeezed as they have been recently, thanks to the Federal Reserve's interest rate cut. But they're hardly back to normal.
In two signs of continued strain, a key bank-to-bank lending rate rose Thursday and the amount of commercial paper in the market fell for the fourth straight week to 15 percent below the level before the investment bank Lehman Brothers Holdings Inc. filed for bankruptcy.
While lending doesn't appear to be in the same seized-up state as last week, the year-end could prove a difficult time for funding as banks and other institutions try to get their books in order, said Kim Rupert, managing director of global fixed income analysis at Action Economics.
"It looks like the central bank's actions are starting to help marginally improve confidence enough where safe haven isn't the only thing on investors' minds," Rupert said. "But it's only one small step so far. It's going to be a very jagged type of improvement. There's still a lot of factors that are going to keep anxiety at elevated levels."
The London Interbank Offered Rate, or Libor, for three-month dollar loans rose to 4.75 percent from 4.52 percent on Wednesday. Just a month ago, three-month Libor was at 2.81 percent.
That stubbornly high Libor is just one of the reasons that the stock market has been tumbling. When banks are loath to lend, a weak economy has a hard time bouncing back. The Dow Jones industrial average sank nearly 679 points on Thursday to the lowest level in five years.
Libor's sharp jump over the past month is worrisome because consumer loans such as adjustable-rate mortgages are tied to Libor — meaning that those mortgages could become harder to pay. Citigroup analysts recently predicted that continued stress in Libor will result in a 10 percent jump in defaults for outstanding non-delinquent adjustable-rate mortgages when they reset.
Libor for overnight dollar loans slipped to 5.09 percent Thursday from 5.38 percent, but still remains extremely high — especially compared to the target Fed funds rate, a key overnight lending rate that the Federal Reserve slashed Wednesday by a half-point to 1.5 percent.
Meanwhile, commercial paper outstanding dropped for the fourth straight week. Commercial paper is a type of debt companies sell to get short-term cash, often so that they can maintain their inventories and payrolls. The Fed said commercial paper outstanding fell by $56.4 billion to a seasonally-adjusted $1.55 trillion in the week ended Oct. 8 — that's down from $1.82 billion on Sept. 10, and down 30 percent from the peak of $2.2 trillion in the summer of 2007.
As companies have a harder time getting financing, businesses and municipalities have been taking action to try to adapt. Connecticut's governor is requesting that banks statewide to contribute at least $1 million each to a lending pool for small businesses. And Apollo Management LP is offering a $540 million capital infusion to its affiliate Hexion Specialty Chemicals to help Hexion close its takeover of Huntsman Corp; Hexion said it doubted that Deutsche Bank AG and Credit Suisse Group AG would provide financing.
Automakers and dealers have been especially hard hit by the double-whammy of a slow economy and squeezed credit. Standard & Poor's Ratings Services on Thursday put General Motors Corp. and its 49 percent-owned finance affiliate GMAC LLC on negative credit watch. It also put Ford Motor Co. on negative credit watch. That means there is a 50 percent chance that S&P will lower the ratings on these companies in the next three months; S&P said that while their liquidity is adequate now, deteriorating conditions could challenge their liquidity in 2009.
There were a few promising signs that the stranglehold on the credit markets is starting to loosen, at least in some areas.
One was that the recent drop in commercial paper was smaller than the $94.9 billion decline in the previous week, and the $61 billion decrease in the week ended Sept. 24. And last week's decline occurred in financial companies' commercial paper and asset-backed commercial paper — commercial paper issued by non-financial companies edged higher overall.
"We're still seeing a lot of investments in overnights and very short maturities," said Alex Roever, a fixed-income analyst with JPMorgan. "The really strong financial and non-financial names — top tier corporations — are seeing stronger interest in one-month, two-month, three-month paper. It's definitely better than where it was a week or so ago."
Moreover, following the Fed's Tuesday decision to buy commercial paper and Wednesday's move to slash the key interest rate, the rates on certain overnight commercial paper fell by 1.15 percentage points on Thursday to 2.35 percent, noted Miller Tabak & Co. analyst Tony Crescenzi.
And IBM Corp. was able to sell $3.9 billion in longer-term bonds on the market Thursday after posting better-than-expected profits.
But investors are still anxious. The yield on the three-month Treasury bill initially edged up on Thursday, but then slipped to 0.58 percent from 0.63 percent late Wednesday. That suggests that demand for T-bills, regarded by investors as the safest assets around, remains high. The discount rate was also 0.58 percent.
Longer-term Treasury yields were mixed after the stock market's plunge.
In late trading, the 2-year Treasury note rose 1/32 to 100 28/32 and yielded 1.55 percent, down from 1.56 percent late Wednesday. The 10-year note fell 28/32 to 101 30/32 and yielded 3.76 percent, up from 3.65 percent. The 30-year bond fell 1 25/32 to 106 31/32 and yielded 4.09 percent, up from 4.05 percent.
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