Fed scales back emergency lending programs

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June 25, 2009

Anonymous The Salem News Thu Jun 25, 2009, 01:44 PM EDT

WASHINGTON (AP) — The Federal Reserve took the first step Thursday toward winding down the numerous emergency lending programs it launched last fall at the height of the financial crisis.

The Fed will allow one program intended to support money market mutual funds to lapse by Oct. 31, and is reducing the amount it will lend to banks under two others.

The Fed also is extending through Feb. 1, 2010, five other programs scheduled to expire Oct. 31. That includes swap lines with 14 central banks that enable them to provide dollars to their financial systems in exchange for giving the Fed foreign currencies.

The changes are the first by the central bank designed to scale back its efforts to support the financial system. The Fed pumped trillions of dollars into commercial and investment banks through an alphabet-soup of emergency programs as the banks hoarded cash and refused to lend to each other and consumers late last year.

At the same time, the Fed is moving cautiously. The program that will end in October hasn't actually been used, and the programs being scaled back have seen much less demand from banks in recent months.

The Fed says 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 "strained for some time."

The Fed said it will allow the Money Market Investor Funding Facility to expire Oct. 31. The program was part of the government's efforts last fall to prevent a run on money market mutual funds, after one fund saw its shares fall below $1 in the wake of Lehman Brothers' collapse in September.

The Fed facility, which was never used, was intended to reassure investors that money funds would be able to fully redeem their investments, by allowing the funds to sell assets to the central bank.

The Fed also said it will reduce the maximum amount it will lend under the Term Auction Facility, which provides one-month loans to banks, to $500 billion from $600 billion.

The Fed has lent $336.6 billion under the TAF, down from a peak of $493.1 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.

The maximum amount outstanding under that program will drop to $75 billion from $200 billion. The use of that program has dropped to $15.75 billion from a peak of $233.6 billion in October.

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