Banks, investment firms trim Fed borrowing

Commercial banks and investment firms scaled back borrowing over the past week from the Federal Reserve’s emergency lending program, a hopeful sign that some credit stresses are easing.

The Fed said Thursday that commercial banks averaged $49.2 billion in daily borrowing over the week ended Wednesday. That was down from $59.7 billion in average daily borrowing logged over the week ended April 1.

Investment firms drew $17.6 billion over the past week from the Fed program. That was down from an average of $19.5 billion the previous week.

The identities of financial institutions that borrow from the Fed program are not released. They now pay just 0.50 percent in interest for the emergency loans.

Still, the Fed’s net holdings of “commercial paper” averaged $250.6 billion over the week ending Wednesday, an increase of $6.3 billion from the previous week.

The first-of-its-kind program started on Oct. 27, a time of intensified credit problems when the Fed began buying commercial paper ? the crucial short-term debt that companies use to pay everyday expenses. The central bank has said about $1.3 trillion worth of commercial paper would qualify.

The Fed also said its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae averaged $236.6 billion over the past week, up $214 million from the previous week. The goal of the program, which started on Jan. 5, is to help the crippled mortgage-finance and housing markets. Mortgage rates have dropped since the Fed announced the creation of the program late last year.

Rates on 30-year mortgages edged up this week but remain near the lowest levels in decades. Freddie Mac reported Thursday that rates on 30-year mortgages averaged 4.87 percent this week, up from 4.78 percent last week, which was the lowest on records dating to 1971.

Squeezed banks and investment firms are borrowing from the Fed because they can’t get money elsewhere. Investors have cut them off and shifted their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers. The lockup in lending has contributed to the recession, which now matches the longest since World War II.

Investment houses in March 2008 were given similar emergency-loan privileges as commercial banks after a run on Bear Stearns pushed what was the nation’s fifth-largest investment bank to the brink of bankruptcy and into a takeover by JPMorgan Chase & Co.

Critics worry the Fed’s actions have put billions of taxpayers’ dollars at risk.

The central bank’s balance sheet now stands at $2.069 trillion, up slightly from last week. The balance sheet has more that doubled since September, growth that reflects the Fed’s many unconventional efforts ? various programs to lend or buy debt ? to mend the financial system and jolt the economy out of recession.

The report also said that credit provided to insurer American International Group Inc. from the Fed averaged $45.6 billion for the week ending Wednesday, up from $44.7 billion the previous week. AIG ? faced with increasing financial stresses ? received a fresh aid package from the government last month. The company’s decision to pay employees millions in bonuses had ignited a public outrage.

Copyright 2009 The Associated Press.