Fed lends less to banks

Government lent financial institutions $160 billion over the past week in emergency lending window, down significantly from prior week. AIG begins to borrow more.

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By David Goldman, CNNMoney.com staff writer

What should Congress do for U.S. automakers?
  • Lend them money
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  • Lend them money but kick out current execs

NEW YORK (CNNMoney.com) -- Financial institutions borrowed a bit less from the Federal Reserve for the second-straight week, according to a report released Thursday.

The Federal Reserve reported that commercial banks borrowed $95.4 billion a day, on average, during the past week. That's down 13.3% from the $110 billion a day they borrowed from the emergency lending window in the previous week, and the record $111.9 billion per day a week earlier.

In its so-called "discount window," the Fed offers overnight funding for commercial banks at a rate slightly higher than its 1.0% targeted funds rate. The discount rate is currently 1.25%.

After the collapse of Bear Stearns in March, the Fed opened its discount window to other financial institutions like investment banks, in an attempt to prevent another one from failing. Investment banks borrowed $64.9 billion a day, on average during the past week, down 15.7% from $77 billion a week ago.

Some analysts have suggested that banks' borrowing needs have not decreased, but they are borrowing less from the discount window because the government is providing funding from a variety of other programs.

Financial institutions can get money from Treasury's $250 billion capital injection plan, the Fed's commercial paper facility and the so-called Term Auction Facility. Treasury Secretary Henry Paulson said Wednesday that the government will also soon open a new facility that will purchase consumer debt.

"It's almost like banks have a buffet of liquidity choices," said Matt McCormick bank analyst and portfolio manager at Bahl & Gaynor Investment Counsel. "The Fed's trying to bail out a leaky boat with eight different types of buckets - no one cares what you call those buckets as long as they keep bailing."

In one such program, the so-called Commercial Paper Funding Facility, the Fed data showed that the government bought $14 billion of short-term corporate debt over the past week, down from $100 billion a week earlier. Since the facility opened on Oct. 20, the Fed has purchased a total of $257.3 billion of commercial paper.

But a separate Fed report showed that the critical short-term business lending market expanded by just $288 million in the past week, far less than the $14 billion that the Fed pumped into the credit system.

"The spigots are not open like they were months ago," said McCormick. "Low interest rates alone will not stimulate demand for loans."

The Fed also reported Thursday that troubled insurer American International Group (AIG, Fortune 500) borrowed even more from the government than it had before. The Fed's numbers, however, do not reflect the terms of AIG's new bailout, which will not go into effect for more than a week.

AIG now owes the government $83.6 billion, up from $81.2 billion as of last week. That includes roughly $63 billion from the $85 billion bridge loan and $20.2 billion from the Fed's $37.8 billion lending facility, according to AIG.

In the coming weeks, the government will restructure the insurer's bailout deal to include a $40 billion loan from the Treasury, a $60 billion loan from the Fed, and two new funding facilities of $23.5 billion and $30 billion. That increases the total amount available to AIG to $152.5 billion from $122.8 billion. To top of page

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