Wall Street Firms Taking Full Advantage of New Access to Fed Discount Window

By Jennifer Yousfi
Managing Editor

Wall Street firms borrowed on average more than $30 billion a day from the U.S. Federal Reserve discount window in the past week.

It has only been two weeks since non-commercial banks, known as primary dealers, were first granted access to the discount window when the Fed made an emergency change to standard procedures in light of The Bear Stearns Cos. Inc. (BSC). [For a complete list of primary dealers, please see the chart below.]

The daily average of $32.92 billion in funds borrowed demonstrates the continued liquidity crunch in the short-term lending markets.

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In an effort to boost liquidity in the financial markets and restore lending confidence, the Fed is making loans to primary dealers through its clearing banks for the first time.

The discount window is normally reserved for commercial banks, which are subject to much stricter banking regulations and oversight than investment banks. The Fed's decision to allow access to troubled Wall Street firms has led to cries for more intense scrutiny for investment banks.

But U.S. Treasury Secretary Henry M. Paulson, Jr. recently called for restraint, saying that granting access to primary dealers is a temporary measure. 

"Recent market conditions are an exception from the norm," Paulson said in a speech at the U.S. Chamber of Commerce of the United States, The New York Times reported. "The Federal Reserve's recent action should be viewed as a precedent only for unusual periods of turmoil."

Also, for the first time, the Fed has expanded the types of loan collateral permissible to include certain mortgage-backed securities.

As a further consideration of the current liquidity crisis, the Fed has extended the term of discount window loans twice. In Sept. 2007, as the subprime crisis first began to unfold, the Fed first extended loan terms from the traditional term of overnight to as much as 30 days.

With the emergency rules put in place on March 16, the Fed extended terms to up to 90 days.

News and Related Story Links:

• Reuters:
  Dealers double pace of discount window borrowing

• Seeking Alpha:
  I-Banks Can't Have their Cake and their Discount Window Too

• The Wall Street Journal:
  Wall Street Taps Fed's New Loan Program

• Money Morning:
  Jim Rogers: "Nowhere does it say you're supposed to bail out investment banks"

• Money Morning:
  Surprise Rate Cut And Bear Stearns Buyout Inspires Investor Skepticism, Not Calm