Banks, investment firms borrow less from Fed at 4:56 AM

WASHINGTON – Banks and investment firms reduced borrowing from the Federal Reserve's emergency lending program over the past week, although demand for the loans remains elevated.

The Fed's report, released Thursday, shows commercial banks averaged $95.4 billion in daily borrowing over the past week. That was down from nearly $110 billion in average daily borrowing logged over the week ended Nov. 5.

For the week ending Wednesday, investment firms drew $64.9 billion. That compared with $77 billion in the previous week. This category was recently broadened to include any loans that were made to the U.S. and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch.

The Fed report also showed that its net holdings of "commercial paper" came to $257.3 billion on Wednesday, up from $243.3 billion last week. Under the first of its kind program started Oct. 27, the Fed is buying mounds of the crucial short-term debt that companies use to pay everyday expenses. The Fed has said about $1.3 trillion worth of commercial paper would qualify.

Squeezed banks and investment firms are borrowing from the Fed because they can't get money elsewhere. Investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lend it to each other or customers. The lockup in lending has contributed to a sharp slowing in the overall economy.

Investment houses in March 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.

The identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay 1.25 percent in interest for the emergency loans.

Since the Bear Stearns debacle in March, the Fed has taken a series of unprecedented steps to get lending — the economy's oxygen — flowing more freely again. The central bank has repeatedly tapped its Depression-era authority to be a lender of last resort not only to financial institutions, but also to other types of companies.

Critics worry the Fed's actions could put billions of taxpayers' dollars at risk.