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Bernanke Says Fed May Extend Wall Street Lending Access to 2009
By Scott Lanman
The balance of loans outstanding from the PDCF dropped to zero as of July 2, the first time that's happened since the program began.... In the July 3 operation, firms submitted bids for $26.1 billion out of $50 billion of Treasuries offered.
So the firms are getting temporary liquidity, paying back the loans and holding on to the toxic securities. Is this helping make a market for the alphabet soup or just a revolving door of the same companies juggling to avoid bankruptcy? Like a consumer taking a cash advance on one card to pay the minimum payment on the other cards?
By Scott Lanman
July 8 (Bloomberg) -- The Federal Reserve may extend securities dealers' access to direct loans from the central bank into 2009 as long as emergency conditions ``continue to prevail,'' Chairman Ben S. Bernanke said.
``The Federal Reserve is strongly committed'' to financial stability and is ``considering several options, including extending the duration of our facilities for primary dealers beyond year-end,'' Bernanke said in a speech to a conference in Arlington, Virginia.
Bernanke also endorsed proposals to set up a federal liquidation process for a failing investment bank. The Treasury should ``take a leading role in any such process, in consultation with the firm's regulator and other authorities,'' he said.
The comments reflect the Fed's assessment last month that financial markets ``remain under considerable stress,'' even after the Fed started the unprecedented lending programs in March. Bernanke at the same time is aiming to address criticism that the Fed's loans to Wall Street may encourage more reckless lending, sowing the seeds of future crises.
The Fed chairman didn't comment on the outlook for the economy or monetary policy in the prepared text of his remarks today to a Federal Deposit Insurance Corp. forum on mortgage lending. Treasury Secretary Henry Paulson and JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon are also scheduled to speak at the event.
Lending Programs
The Fed's Primary Dealer Credit Facility, which provides direct loans, and the Term Securities Lending Facility, which auctions as much as $200 billion in Treasuries, were created in March in response to the credit crisis and collapse of Bear Stearns Cos. Both programs are aimed at the 20 primary dealers in U.S. government debt.
Bernanke's speech today marks the first time he has indicated how long he may extend both programs, which were created under the Fed's authority to lend to nonbanks in ``unusual and exigent circumstances.'' Officials in March said the PDCF would last for ``at least'' six months.
The Fed is working with the Securities and Exchange Commission and securities dealers ``to increase the firms' capital and liquidity buffers,'' Bernanke said.
Securities firms have cut back on their use of the programs in recent weeks. The balance of loans outstanding from the PDCF dropped to zero as of July 2, the first time that's happened since the program began. On March 26, the end of the first full week of operation, the PDCF had a balance of $37 billion.
Bids Decline
Bids in the TSLF's weekly auctions, in which dealers swap securities such as mortgage-backed debt for Treasuries from the New York Fed, have declined since the start of the program. In the July 3 operation, firms submitted bids for $26.1 billion out of $50 billion of Treasuries offered.
One gauge of financial stress watched by the Fed has remained elevated. The difference between the overnight indexed swap rate, a measure of what traders expect for the Fed's benchmark rate, and three-month interbank loans in dollars was 0.78 percentage point yesterday, about the same as the start of May.
``Although short-term funding markets remain strained, they have improved somewhat since March,'' Bernanke said.
Bernanke's comments on the resolution authority are in line with Treasury Secretary Henry Paulson's July 2 statement that ``any commitment of government support should be an extraordinary event that requires the engagement of the executive branch.''
Bair's Call
FDIC Chairman Sheila Bair has also said an agency should be given such liquidation authority for investment banks. The FDIC has that power over lenders whose deposits it insures. In the case of commercial banks, the use of taxpayer funds in an emergency requires the approval of two-thirds majorities of the FDIC and Fed boards, and of the Treasury secretary in consultation with the president.
``Despite the complexities of designing a resolution regime for securities firms, I believe it is worth the effort,'' Bernanke said today. ``In particular, by setting a high bar for such actions, the adverse effects on market discipline could be minimized.''
Bernanke endorsed several ways for the Fed and other U.S. agencies to gain more oversight of investment banks and financial markets. Congress should legislate ``consolidated supervision'' of investment banks and other big securities firms, with the unspecified regulator having authority over capital, liquidity holdings and risk management, he said.
The Fed itself should also get ``explicit oversight authority'' over payment and settlement systems, putting the Fed on par with counterparts from around the world, Bernanke said.
New Responsibility
Congress may consider giving the Fed responsibility for ``promoting the overall stability of financial markets,'' Bernanke said. Still, ``it would be particularly important to make clear that any government intervention to avoid the disorderly liquidation of firms on the verge of bankruptcy should use clearly defined tools and processes,'' he said.
The Fed will play a part in setting capital cushions at securities firms under an agreement yesterday with the SEC designed to dispel concern a failing financial company without central bank oversight could threaten the economy.
The Fed and SEC will collaborate in determining ``guidelines or rules concerning the capital, liquidity and funding'' arrangements of investment banks, the accord said. They will also cooperate in designing ``risk management systems and controls'' for securities firms.
``The Federal Reserve is strongly committed'' to financial stability and is ``considering several options, including extending the duration of our facilities for primary dealers beyond year-end,'' Bernanke said in a speech to a conference in Arlington, Virginia.
Bernanke also endorsed proposals to set up a federal liquidation process for a failing investment bank. The Treasury should ``take a leading role in any such process, in consultation with the firm's regulator and other authorities,'' he said.
The comments reflect the Fed's assessment last month that financial markets ``remain under considerable stress,'' even after the Fed started the unprecedented lending programs in March. Bernanke at the same time is aiming to address criticism that the Fed's loans to Wall Street may encourage more reckless lending, sowing the seeds of future crises.
The Fed chairman didn't comment on the outlook for the economy or monetary policy in the prepared text of his remarks today to a Federal Deposit Insurance Corp. forum on mortgage lending. Treasury Secretary Henry Paulson and JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon are also scheduled to speak at the event.
Lending Programs
The Fed's Primary Dealer Credit Facility, which provides direct loans, and the Term Securities Lending Facility, which auctions as much as $200 billion in Treasuries, were created in March in response to the credit crisis and collapse of Bear Stearns Cos. Both programs are aimed at the 20 primary dealers in U.S. government debt.
Bernanke's speech today marks the first time he has indicated how long he may extend both programs, which were created under the Fed's authority to lend to nonbanks in ``unusual and exigent circumstances.'' Officials in March said the PDCF would last for ``at least'' six months.
The Fed is working with the Securities and Exchange Commission and securities dealers ``to increase the firms' capital and liquidity buffers,'' Bernanke said.
Securities firms have cut back on their use of the programs in recent weeks. The balance of loans outstanding from the PDCF dropped to zero as of July 2, the first time that's happened since the program began. On March 26, the end of the first full week of operation, the PDCF had a balance of $37 billion.
Bids Decline
Bids in the TSLF's weekly auctions, in which dealers swap securities such as mortgage-backed debt for Treasuries from the New York Fed, have declined since the start of the program. In the July 3 operation, firms submitted bids for $26.1 billion out of $50 billion of Treasuries offered.
One gauge of financial stress watched by the Fed has remained elevated. The difference between the overnight indexed swap rate, a measure of what traders expect for the Fed's benchmark rate, and three-month interbank loans in dollars was 0.78 percentage point yesterday, about the same as the start of May.
``Although short-term funding markets remain strained, they have improved somewhat since March,'' Bernanke said.
Bernanke's comments on the resolution authority are in line with Treasury Secretary Henry Paulson's July 2 statement that ``any commitment of government support should be an extraordinary event that requires the engagement of the executive branch.''
Bair's Call
FDIC Chairman Sheila Bair has also said an agency should be given such liquidation authority for investment banks. The FDIC has that power over lenders whose deposits it insures. In the case of commercial banks, the use of taxpayer funds in an emergency requires the approval of two-thirds majorities of the FDIC and Fed boards, and of the Treasury secretary in consultation with the president.
``Despite the complexities of designing a resolution regime for securities firms, I believe it is worth the effort,'' Bernanke said today. ``In particular, by setting a high bar for such actions, the adverse effects on market discipline could be minimized.''
Bernanke endorsed several ways for the Fed and other U.S. agencies to gain more oversight of investment banks and financial markets. Congress should legislate ``consolidated supervision'' of investment banks and other big securities firms, with the unspecified regulator having authority over capital, liquidity holdings and risk management, he said.
The Fed itself should also get ``explicit oversight authority'' over payment and settlement systems, putting the Fed on par with counterparts from around the world, Bernanke said.
New Responsibility
Congress may consider giving the Fed responsibility for ``promoting the overall stability of financial markets,'' Bernanke said. Still, ``it would be particularly important to make clear that any government intervention to avoid the disorderly liquidation of firms on the verge of bankruptcy should use clearly defined tools and processes,'' he said.
The Fed will play a part in setting capital cushions at securities firms under an agreement yesterday with the SEC designed to dispel concern a failing financial company without central bank oversight could threaten the economy.
The Fed and SEC will collaborate in determining ``guidelines or rules concerning the capital, liquidity and funding'' arrangements of investment banks, the accord said. They will also cooperate in designing ``risk management systems and controls'' for securities firms.
The balance of loans outstanding from the PDCF dropped to zero as of July 2, the first time that's happened since the program began.... In the July 3 operation, firms submitted bids for $26.1 billion out of $50 billion of Treasuries offered.
So the firms are getting temporary liquidity, paying back the loans and holding on to the toxic securities. Is this helping make a market for the alphabet soup or just a revolving door of the same companies juggling to avoid bankruptcy? Like a consumer taking a cash advance on one card to pay the minimum payment on the other cards?
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