Rushing to head off a global panic after a fire sale at Wall Street giant Bear Stearns, the U.S. Federal Reserve moved to keep cash flowing in the financial system with a cut of a key rate and a pledge of aid to the brokerage system. The U.S. central bank, in a rare March 16 night announcement, cut a rate for direct loans to some financial institutions and created a special lending program for securities firms caught in a cash squeeze stemming from the subprime real estate crisis.
Despite the Fed actions stocks plunged across Asia and Europe on March 17, oil and gold hit fresh highs and the dollar fell to a new bottom as investors sought a safe haven from the global credit crunch roiling the markets. The U.S. central bank announced it was cutting by a quarter-point to 3.25% its primary credit rate, which is the rate offered at the Fed's discount window for loans to institutions "in sound condition."
The cut, announced as Asian financial markets were set to open, came after a week of market turmoil and was part of "two initiatives designed to bolster market liquidity and promote orderly market functioning," a Fed statement said. The Fed said it would make liquidity available starting March 17 to "primary dealers," which include brokerages that were not previously eligible for direct loans from the central bank. The Fed board also extended the maximum time of discount window loans to 90 days from 30 days.
"The Fed obviously didn't think they could wait until March 18 to make the announcement," said Robert Brusca at FAO Economics. "They obviously feared some type of run."
Brusca said one sign of panic was the deal announced in which JPMorgan Chase agreed to buy Bear Stearns for two dollars a share -- a fraction of its worth just a week ago and a pittance compared to a year ago. "This is not just Bear Stearns," Brusca said. "People have to wonder about other securities firms. Bear Stearns was at $150 a share a year ago and now it was sold for two dollars. You don't have to be an expert to know something is wrong."
The Fed statement said the central bank had authorized the Federal Reserve Bank of New York "to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets" starting March 17 and to be in place for at least six months. Financial firms would be able to borrow at the primary credit or discount rate, which was just reduced by the Fed.
Copyright Agence France-Presse, 2008