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Banks make great show of borrowing at Fed's discount window
Four Major Banks Borrow
from Fed's Discount Window
By Adam Schreck
via Yahoo News
Wednesday, August 22, 2007
NEW YORK -- Four major banks said Wednesday they each borrowed $500 million from the Federal Reserve's discount window, lending weight to the central bank's efforts to restore liquidity to tight markets.
In going public with the moves, Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp., and Wachovia Corp. each stressed they have "substantial liquidity" and the ability to borrow money elsewhere. The borrowings, at least in part, seemed meant to reassure investors' jitters about the credit crunch rattling Wall Street.
In a joint statement, the latter three banks said they decided to borrow the money to demonstrate "the potential value of the Fed's primary credit facility" and encourage its use by other banks.
"Simultaneous action by these four institutions -- at the same time, on the same day, for the same amount of money -- suggests that the move is intended to have some symbolic value," said Aaron Gurwitz, co-head of portfolio strategy at Lehman Brothers Investment Management Division. "But it may also be a way for them to make money."
It was not clear if other banks had also decided to borrow from the central bank.
On Friday, the Fed took the dramatic step of cutting its discount rate on loans to banks, to 5.75 percent from 6.25 percent, in an attempt to alleviate Wall Street's credit squeeze. It also made technical changes to make it easier for banks to get discount loans, including extending the credit period to up to 30 days.
Tapping the discount window had previously been seen as a last resort for banks in trouble, a perception the Fed sought to eliminate.
Companies have had an increasingly tough time borrowing money in recent weeks as some homeowners have begun to default on their mortgages. Investors who once repurchased those home loans have since stopped buying, causing the market for them to dry up.
Wall Street, in turn, has grown more wary of many types of risky investments, and that has made it harder for many companies to borrow money. By making borrowing from its discount window more attractive, the Fed had hoped to entice banks to use the facility and inject more cash into the banking system.
Gurwitz said the banks' move increases the likelihood those efforts will be successful.
"They're trying to give markets confidence that all of the major financial institutions will be able to meet their financial obligations in a way that's not too painful," he said.
Citigroup was the first to announce its decision to borrow the money, "on behalf of its clients" at Citibank. It did not rule out further withdrawals.
"Citi is pleased to inject liquidity into the financial system during times of market stress and to support creditworthy clients," the company said. "Citibank stands ready to continue to access the discount window as client needs and market conditions warrant."
It was followed minutes later by the three other banks.
"The companies believe it is important at this time to take a leadership role in demonstrating the potential value of the Fed's primary credit facility and to encourage its use by other financial institutions," their statement said. The three added that they hoped their actions would "promote broad acceptance of the use of the facility."
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