THE Federal Reserve has widened the collateral it accepts for loans to securities companies to include stocks in an effort to help Wall Street weather Lehman Brothers' plans for bankruptcy.
The Fed has also boosted its program for lending Treasury notes to bond dealers by $US25 billion, bringing it to $US200 billion ($A243 billion). At the same time, a group of 10 banks that includes JPMorgan Chase, Goldman Sachs and Citigroup have formed a $US70 billion fund to ensure market liquidity.
Central bankers and banking leaders acted after three days of emergency talks led by Treasury Secretary Henry Paulson and New York Fed president Timothy Geithner on the mounting turmoil in financial markets.
The steps may spur speculation that the Fed will take further action, including lowering interest rates, to stem a deepening in the year-long credit crisis.
It was "critically important to put in a firebreak to an already weakened system", said Saumil Parikh, of Pacific Investment Management in California. Policymakers were aiming to prevent a "broad run on the US financial system", he said.
The Fed's announcement came early yesterday Australian time following news that Barclays and Bank of America had abandoned talks to buy Lehman, the investment bank that last week lost 77% of its value. Bank of America separately agreed to acquire Merrill Lynch for about $US50 billion.
The easier terms for Fed loans are the latest in an effort by the central bank to ensure liquidity and alleviate a jump in funding costs this year. The program for loans to the primary dealers in Treasury notes was set up in March in the aftermath of the collapse of Bear Stearns.
Speculation may grow that the Fed will now consider lowering interest rates further to offset the impact of a tighter credit crunch on the faltering economy. As recently as August 5, the rate-setting Federal Open Market Committee said it "generally anticipated" the next move in rates would be an increase.
Government figures last week showed that retail sales fell in August, a month when the US unemployment rate climbed to 6.1%, the highest level in five years.
Liquidity moves "by the Fed can only go so far", said Mark Spindel, chief investment officer at Potomac River Capital, a Washington DC investment firm. "It just might be that firms and investors might have to take more losses, and maybe what the economy and markets need are lower rates."
The statement by Fed chairman Ben Bernanke said the Fed has been in touch with other central banks "to monitor and share conditions in financial markets and firms around the world".
The Fed will now accept equities in the Primary Dealer Credit Facility, its program for lending cash directly to securities companies, in addition to investment-grade debt.
BLOOMBERG
