Will the Fed inject Treasurys to keep Fannie Mae and Freddie Mac out of bankruptcy?
*The Wall Street Journal, by Greg Ip, March 11, 2008
Fed Works With Overseas Banks To Expand Securities Lending
“In another global show of financial force, the Federal Reserve and four other central banks announced significantly expanded loans of cash and securities to banks and securities dealers in an effort to alleviate growing strains in the credit markets.
For the Fed, the steps are yet another attempt to address the credit crisis through means other than steep cuts in short-term interest rates. But one of the consequences is that its own balance sheet is looking riskier as its composition shifts from super safe Treasurys to less safe loans, mortgage-backed securities and the like. The Fed believes it has plenty of cushion in the form of extra collateral and guarantees behind those other assets to virtually eliminate the risk of loss.
The Fed said it would create a new program to supplement its low-profile securities lending program to enable bond dealers to borrow up to $200 billion of much-sought Treasurys, and pledge a range of mortgage backed securities (MBS) as collateral. It will make the Treasurys available for up to 28 days at a time rather than overnight, as is the case in the existing program.
By providing an outlet for those MBS, the program is meant to make dealers more comfortable buying and holding such securities which are now being dumped by investors facing margin calls and others nervous about the strength of Fannie Mae and Freddie Mac, the huge, privately-owned government-sponsored mortgage agencies that guarantee most MBS.”
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