Federal Reserve takes steps to break through credit clogs

WASHINGTON -- Focused on getting the nation's credit gears smoothly working again, the Federal Reserve is letting Wall Street firms draw emergency loans into next year and giving financial companies more options to help them overcome credit problems.

The Fed's announcement Wednesday marks its latest effort to get credit flowing more freely. A global credit crisis that erupted last August has hobbled the U.S. economy, already reeling from a housing meltdown.

As financial companies have racked up multibillion dollar losses on soured mortgage investments and credit problems spread to other areas, firms have hoarded cash and clamped down on lending. That has crimped spending by people and businesses, which in turn has weighed on the national economy -- a vicious cycle the Fed wants desperately to break.

To that end, the Fed announced that investment houses can now tap the central bank for a quick source of cash through Jan 30. Originally the program, started March 17, was supposed to last until mid-September.

Another program, where investment firms can temporarily swap more risky investments for super-safe Treasury securities also will continue through Jan. 30, the Fed said. It also will let commercial banks, in a separate program, bid on cash loans that last longer -- for 84 days, besides the 28-day loans now available.

The Fed said it was taking these steps "in light of continued fragile circumstances in financial markets."

Earlier this week, Merrill Lynch & Co. announced plans to write down another $5.7 billion tied to bad mortgage debt, raising fears that other banks and financial firms will follow.

Merrill Lynch said it would sell repackaged mortgage-backed securities for just $7 billion -- only a few weeks after they had been valued at $31 billion. The decision gave the securities a current value of about 22 cents on the dollar and set a new, low benchmark that other Wall Street banks -- including Citigroup Inc., Lehman Brothers Holdings Inc., Morgan Stanley, and JPMorgan Chase & Co. -- might have to meet when valuing their own investments.

"This is no time to pull the liquidity rug out from under financial companies," said Ken Mayland, president of ClearView Economics.

Although Fed Chairman Ben Bernanke has said the central bank's efforts thus far have helped ease some stresses, he also has said markets remain fragile and that it will take time to return them to good health.

Now that inflation worries have forced the Fed to halt a nearly yearlong campaign of bracing rate cuts, the central bank will be looking for other ways -- such as those announced Wednesday -- to help ease financial problems. The Fed is expected to leave its key rate steady when it meets next week.

"Ramping up the liquidity facilities, while at the same time keeping benchmark borrowing rates steady, looks like the best strategy for dealing with the twin threats (financial stresses and inflation fears) at this particular juncture," said Brian Bethune, economist at Global Insight.

Investment houses were given similar, emergency loan privileges as commercial banks after a run on Bear Stearns pushed the nation's fifth-largest investment bank to the brink of bankruptcy. The situation raised fears that other Wall Street firms might be in jeopardy.

In the swap program, which began on March 27, investment firms bidding on the Treasury securities can put up as collateral more risky investments. These include certain mortgage-backed securities and bonds secured by federally guaranteed student loans.

The program is intended to make investment companies more inclined to lend to each other. A second goal is providing relief to the distressed market for mortgage-linked securities and for student loans.

The Fed also said it will let Wall Street firms place bids on an option to borrow the Treasury securities. Up to $50 billion would be made available for this. The Fed didn't say when the first auction of this type would be conducted. The notion here is to give firms -- unsure whether they might need the Treasury securities -- an insurance policy of sorts.

Starting on Aug. 11, the Fed will give banks the option of bidding on 84-day cash loans from the Fed, besides the 28-day loans now available. Specifically, the Fed will conduct biweekly auctions. They will alternate between making available $75 billion in 28-day loans and $25 billion in 84-day loans. The steps expand a program started in December aimed at helping banks overcome their credit problems so that they can keep lending to customers.

The European Central Bank and the Swiss National Bank have informed the Fed that they also will make available to their banks similar 84-day cash loans. To help on this front, the Fed also boosted its credit line with the ECB to $55 billion from $50 billion.

On the other side of the Atlantic, the ECB and the Swiss National Bank announced Wednesday they will make billions of U.S. dollars available to banks still starving for the currency. The ECB -- the central bank for the 15 countries that use the euro -- said it will make 84-day loans available starting on Aug. 8. The Swiss National Bank said it would start making 84-day loans available on Aug. 12.

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AP Business Writer Matt Moore contributed to this report from Frankfurt.