Banks borrow less, investment firms borrow more

By JEANNINE AVERSA Comments 0
Published: December 4, 2008

WASHINGTON (AP) — Commercial banks borrowed slightly less from the Federal Reserve's emergency lending program over the past week, while investment firms stepped up their loans.

The Fed's report, released Thursday, showed commercial banks averaged $90.3 billion in daily borrowing over the week ending Wednesday. That was down from $93.6 billion in average daily borrowing logged over the week ended Nov. 26.

Investment firms drew $57.2 billion over the past week. That was up from an average of $52.4 billion the previous week. This category was recently broadened 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 its net holdings of "commercial paper" averaged $297.6 billion over the week ending Wednesday, an increase of $15.4 billion from the previous week. Under the first of its kind program started Oct. 27, the Fed is buying mounds of the crucial short-term debt that companies use to pay everyday expenses. The Fed has said about $1.3 trillion worth of commercial paper would qualify.

Squeezed banks and investment firms are borrowing from the Fed because they can't get money elsewhere. 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 lockup in lending has contributed to the ongoing recession that began in December 2007.

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 and into a takeover by JPMorgan Chase.

The identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay 1.25 percent in interest for the emergency loans.

Critics worry the Fed's actions could put billions of taxpayers' dollars at risk.

The report also showed that insurance giant American International Group's loan from the Fed averaged $55.9 billion for the week ending Wednesday. That was down by $23.6 billion from the average the previous week. The reduction reflected a modification of the government's support program for AIG announced last month.

Under the restructured aid package, AIG receives $40 billion from the Treasury Department's $700 billion bailout fund. That extra support from Treasury allowed the Fed to slightly reduce its total loans to AIG.