The Federal Reserve bypassed its own emergency-lending policies to let securities firms borrow at the same interest rate as commercial banks as the central bank sought last weekend to stave off a financial-market meltdown.
Guidelines revised in 2002 say the Fed should charge non-banks more than the highest rate that commercial banks pay. Instead, Chairman Ben S. Bernanke and his colleagues, in emergency votes on March 16, invoked broader authority in the Federal Reserve Act to give Wall Street dealers the same rate as banks.
Bernanke raced to unveil the steps before trading on the Tokyo Stock Exchange began on March 17. The weekend action, timed to complement JPMorgan's rescue of Bear Stearns, included a cut in the so-called discount rate and the opening of borrowing to the primary dealers in Treasury securities, not all of which are banks.
The changes were the Fed's most aggressive response to the 8-month-old credit squeeze that's worsening the housing recession and the economic slowdown. Bear sought the Fed's help after a run on the firm, the second-largest underwriter of US mortgage-backed securities.
The 2002 guidelines say that non-banks may only receive emergency cash "at a rate above the highest rate in effect for advances to depository institutions." That means securities firms may normally have to pay more than the current 3 percent rate reserved for banks that are less financially sound.
In deciding to charge securities firms such as Goldman Sachs Group Inc., Morgan Stanley and Lehman Brothers Holdings Inc. the same rate as commercial banks, the Fed used 1920s-era authority provided by Congress to set interest rates that the law says "shall be fixed with a view of accommodating commerce and business," the Fed staff official said.
The Fed reduced the primary discount rate March 18 by 0.75 percentage point to 2.5 percent. The secondary rate, offered to more-distressed banks, is a half-point higher, at 3 percent.
The federal funds rate, the more closely-watched US short-term benchmark, was cut by the same margin to 2.25 percent.
Story contributed by Bloomberg: Read More
Guidelines revised in 2002 say the Fed should charge non-banks more than the highest rate that commercial banks pay. Instead, Chairman Ben S. Bernanke and his colleagues, in emergency votes on March 16, invoked broader authority in the Federal Reserve Act to give Wall Street dealers the same rate as banks.
Bernanke raced to unveil the steps before trading on the Tokyo Stock Exchange began on March 17. The weekend action, timed to complement JPMorgan's rescue of Bear Stearns, included a cut in the so-called discount rate and the opening of borrowing to the primary dealers in Treasury securities, not all of which are banks.
The changes were the Fed's most aggressive response to the 8-month-old credit squeeze that's worsening the housing recession and the economic slowdown. Bear sought the Fed's help after a run on the firm, the second-largest underwriter of US mortgage-backed securities.
The 2002 guidelines say that non-banks may only receive emergency cash "at a rate above the highest rate in effect for advances to depository institutions." That means securities firms may normally have to pay more than the current 3 percent rate reserved for banks that are less financially sound.
In deciding to charge securities firms such as Goldman Sachs Group Inc., Morgan Stanley and Lehman Brothers Holdings Inc. the same rate as commercial banks, the Fed used 1920s-era authority provided by Congress to set interest rates that the law says "shall be fixed with a view of accommodating commerce and business," the Fed staff official said.
The Fed reduced the primary discount rate March 18 by 0.75 percentage point to 2.5 percent. The secondary rate, offered to more-distressed banks, is a half-point higher, at 3 percent.
The federal funds rate, the more closely-watched US short-term benchmark, was cut by the same margin to 2.25 percent.
Story contributed by Bloomberg: Read More
