Fed takes further steps to ease credit crunch

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Market update

Quotes delayed 15+ min.

The housing meltdown — leading to sagging home prices and record-high foreclosures — has caused financial institutes to rack up huge losses in bad mortgage investments. Fannie Mae and Freddie Mac recently reported fourth-quarter losses totaling $6.1 billion and predicted multibillion-dollar losses throughout this year, amplifying concerns about their stability. Prices also have plunged recently for the billions of dollars of mortgage securities that Fannie Mae and Freddie Mac guarantee, package and sell to investors as supply has outstripped demand.

The Fed’s move comes as banks and other financial institutions face cash crunches.

“Pressures in some of these markets have recently increased again,” the Fed said in a statement. “We all continue to work together and will take appropriate steps to address those liquidity pressures.” The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.

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The loans of Treasury securities would be made available through weekly auctions, beginning on March 27.

For now, up to $200 billion of Treasury securities is envisioned being made available. Fed officials, however, didn’t rule out additional operations of this sort down the road.

Next steps? Some economists said the Fed might move to accept an even wider array of collateral for the auctions.

“This will not turn the economy around or fix all the problems in the markets but it should reduce the liquidity issue, at least for now,” said Ian Shepherdson, chief economist at High Frequency Economics.

White House press secretary Dana Perino said President Bush welcomed the latest step and “has full confidence in Ben Bernanke at the Fed.”

Since December, the Federal Reserve has been making short-term loans of cash available to banks through a new auction setup. With the latest bank auction results announced Tuesday, the Fed has now made $210 billion available to squeezed banks in hopes it will help them to continue lending to individuals and companies.

Separately, the Fed also on Tuesday said it has authorized increases in existing programs called “swap lines” with the European Central Bank and the Swiss National Bank

“These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB respectively,” the Fed said, extending the term of these swap lines through Sept. 30.

The European Central Bank, in conjunction with the Fed, said it would offer U.S. dollars to euro money markets of up to $15 billion. It took similar action in December and January. The Frankfurt-based central bank for the 15 countries that use the euro said it has been working closely with other central banks.

A meltdown in the housing and credit markets has made banks and other financial institutions reluctant to lend to each other, causing a cash crunch. Financial companies racked up multibillion-dollar losses as investments in mortgage-backed securities soured with the housing market’s bust. Problems first started in the market for subprime mortgages— those made to people with blemished credit histories. However, troubles have spread to other areas.

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