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[b]Fed Lends Record to Wall Street, $28 Billion to AIG (Update1) [b]

By Scott Lanman

Sept. 18 (Bloomberg) -- The Federal Reserve lent a record $59.8 billion to securities firms and $28 billion to American International Group Inc. as of yesterday, while daily borrowing by commercial banks increased in the past week to a fourth straight high.

Loans through the Primary Dealer Credit Facility averaged $20.3 billion in the seven days through Sept. 17, the first time since July that Wall Street has tapped the emergency program, the Fed said today in its weekly report. Commercial bank borrowing through the traditional discount window rose $1.8 billion to $21.6 billion, finishing the week with a $33.4 billion balance.

Policy makers are trying to halt the yearlong credit crisis by expanding the central bank's balance sheet and pumping the most credit into the financial system since the Great Depression.

The Fed, acting after the failure of Lehman Brothers Holdings Inc., backed the government takeover of American Insurance Group Inc. on Sept. 16 with an $85 billion credit line.

``Funding yourself at the discount window right now and through these facilities that are in place is pretty much a no- brainer'' because of the higher cost of credit elsewhere, said Robert Eisenbeis, chief monetary economist at Cumberland Advisors and a former research director at the Atlanta Fed.

Still, the cheap funds may prolong the credit crisis by allowing financial institutions to hold impaired mortgage-related assets and other distressed investments longer than they otherwise would, Eisenbeis said.

Accepts Equities

The central bank also said on Sept. 14 it will accept equities as collateral from securities firms under the PDCF. That day Citigroup Inc. and nine other large banks said they would use the program starting this week as they create a $70 billion lending program. On Sept. 7 the Fed supported the U.S. Treasury seizure of Fannie Mae and Freddie Mac.

Today's report, providing statistics as of Sept. 17, doesn't identify borrowers through the primary-dealer facility.

The report doesn't yet reflect Treasury's plan, announced this week, to sell $200 billion of government securities to expand the Fed's balance sheet. The first special sale yesterday, totaling $40 billion of 35-day bills, was to settle today.

Fed holdings of U.S. Treasury securities rose $56 million to a daily average of $479.8 billion. The central bank had about $791 billion of Treasuries at the start of the credit crisis in August 2007.

Pumping Credit

The Fed and other central banks for the biggest economies announced today a plan to pump $180 billion into the global financial system. Separately, the Fed added $105 billion to the banking system with repurchase agreements after channeling $140 billion into banks this week.

Repurchases on the balance sheet rose $13.7 billion to a daily average of $124.5 billion.

The $33.4 billion balance for borrowing by commercial banks rose from $23.5 billion a week earlier. The Fed's single-day record balance for discount-window lending is $45.5 billion on Sept. 12, 2001, the day after the terrorist attacks on the World Trade Center and the Pentagon. The reported daily average for that week was $11.7 billion.

The subprime-mortgage collapse has led to $518 billion of writedowns and losses at major financial institutions since the start of 2007.

The PDCF showed during two weeks in July average daily loans of $9 million and $3 million. That month the central bank extended the PDCF through Jan. 30 because of ``continued fragile circumstances in financial markets.'' It was originally set to end as soon as this month.

Accrues Interest

The three-month London Interbank Offered Rate in dollars was 3.204 percent today. Commercial banks can take out up to 90-day loans from the Fed at 2.25 percent. Primary dealers pay the same rate for overnight loans. The AIG loan accrues interest at three- month Libor plus 8.5 percentage points.

The PDCF offers the 19 primary dealers that trade Treasuries with the New York Fed access to direct loans. Dealers can submit collateral including Treasuries and asset-backed debt, corporate bonds and municipal bonds with investment grades.

The Fed agreed in March to back the takeover of Bear Stearns Cos. by JPMorgan Chase & Co. by assuming about $29 billion of mortgage-backed and other debt from Bear Stearns.

Fed policy makers kept the benchmark rate at 2 percent at their last meeting two days ago, rebuffing calls by some investors for a cut to ease the effects of financial turmoil on the economy. Traders see a 78 percent chance of a quarter-point reduction at or before the next meeting, Oct. 28-29.

No Formal Target

The Fed also reported that the M2 money supply fell by $1.9 billion in the week ended Sept. 8. That left M2 growing at an annual rate of 5.8 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.

During the latest reporting week, M1 fell by $5.2 billion. Over the past 52 weeks, M1 increased 1.9 percent. The Fed no longer publishes figures for M3.

Meantime, the Fed reported two net misses in projections. The first occurred Sept. 15 ``when Foreign RP pool and Treasury balances were lower than expected, resulting in an increase in reserves,'' the Fed said in a press release. The other occurred yesterday ``when other F.R. liabilities was lower than expected, resulting in a decrease in reserves,'' the Fed said.

A net miss occurs when the actual reserve level in the banking system diverges from the Fed's projections for a day by $2 billion or more. If the level is outside expectations, the federal funds rate can deviate from target.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net

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