Fed reduces several emergency lending programs

By CHRISTOPHER S. RUGABER Associated Press

June 25, 2009, 11:11PM

WASHINGTON — The Federal Reserve moved Thursday for the first time to scale back several of the emergency lending programs it launched last fall at the height of the financial crisis.

The central bank’s announcement carried political overtones because it came the same day that Fed Chairman Ben Bernanke on Capitol Hill disputed accusations that he pressured Bank of America into acquiring Merrill Lynch in a deal that ultimately cost taxpayers $20 billion.

The Fed will allow one program intended to support money market mutual funds — which hasn’t been used — to expire Oct. 30. And it’s reducing what it will lend banks under two other programs.

However, the Fed said banks have increased their borrowing from its emergency lending program, while the use of some other credit programs fell.

The Fed on Thursday said commercial banks averaged $39.1 billion in daily borrowing over the week that ended Wednesday. That was up from $36.2 billion in the week ending June 17.

The Fed has pumped trillions of dollars into commercial and investment banks through an alphabet soup of emergency programs, after struggling banks hoarded cash and refused to lend to each other and consumers.

The central bank on Thursday extended until Feb. 1, 2010, five lending programs that were to expire Oct. 30.

In addition, the Fed is buying $1.8 trillion in mortgage-backed securities, Treasury bonds and other debt in an effort to keep interest rates low. The extended programs include swap lines with more than a dozen foreign central banks that let them provide dollars to their financial systems in exchange for giving the Fed foreign currencies.

The Fed said the moves reflect its view that “financial markets have improved in recent months, but market functioning in many areas remains impaired” and likely will be “for some time.”

The Money Market Investor Funding Facility, which will be allowed to expire Oct. 31, was part of an effort last fall to prevent a run on money funds in the wake of Lehman Brothers’ collapse in September. The facility would have allowed the funds to sell assets to the central bank.

In addition, the Fed said it will reduce the maximum it will lend under the Term Auction Facility, or TAF, which provides one-month loans to banks, to $500 billion from $600 billion. The Fed has lent $337 billion under TAF, down from a peak of more than $490 billion in March.

The Term Securities Lending Facility, which allows investment banks to borrow the Fed’s Treasury securities in exchange for riskier mortgage-backed securities and corporate bonds, also is being scaled down.

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