| NEW YORK
NEW YORK One week into the Fed's effort to
grease the rusty wheels of the U.S. credit system, Wall Street
is wondering just who needs the money because there's no line
at the window.
Federal Reserve data released late Thursday reveals only a
modest increase in direct Fed loans to banks, apart from funds
borrowed by five major institutions in what was seen as a
None of the five -- Citigroup (C.N), JPMorgan Chase
(JPM.N), Bank of America (BAC.N), Wachovia WB.N and Germany's
Deutsche Bank (DBKGn.DE) -- said they needed the money. The
identities of other borrowers is not known.
"The window is open, but nobody came," said Lawrence Dyer,
interest rate strategist at HSBC Securities USA, in New York.
In a surprise move a week ago, the Fed cut the discount
rate for loans directly to banks to 5.75 percent from 6.25
percent. The action was an effort to restore liquidity to
markets worried about creditworthiness given the losses
emanating from securities linked to the U.S. mortgage market.
There is little agreement about why banks are not rushing
to Fed's discount window, where they can get emergency loans.
While the Fed charges above market rate on its direct loans
to banks, many banks and investors are fearful of making loans
to each other, especially to those with subprime mortgages on
On Thursday, Fed's direct loans to banks averaged $1.541
billion a day in the week ended August 22, the highest level
since September 2001. But a big chunk of that activity stems
from $2 billion linked to Citigroup, Bank of America, JPMorgan
Chase and Wachovia, each of whom borrowed $500 million.
"If we understand the discount rate window operations
correctly, we have to conclude that it is not successful," said
Andrew Brenner, co-head of structured product and emerging
markets at MF Global, in a research note.
But a week's worth of activity is too small a window on
which to pass judgment, others contend.
"It's too soon to say it's a failure. Maybe people didn't
need to borrow from discount window," said Robert Brusca, chief
economist at Fact and Opinion Economics in New York. Brusca was
also a staff economist at the New York Fed from 1977 to 1983.
One former Fed official downplayed the less than robust
level of bank borrowing from the Fed, saying that discount
window moves tend to be symbolic in nature, in contrast the
open market operations it conducts.
In two weeks, the Fed has injected more than $100 billion
in temporary cash through repurchase agreements into the U.S.
"The Fed's (discount rate) move was essentially a morale
building exercise to calm the market about credit
availability," said William Ford, former president of the
Atlanta Fed and an economic and finance professor at the Middle
Tennessee State University.
"I don't think anyone inside the Fed really expected
billions of dollars in new borrowing through the discount
window, other than the little bit we've seen," said Ford, who
is now based in Murfreesboro, Tennessee.
Still, the Fed is preparing for bank borrowing to increase
despite the initial tepid reception to an easier discount
window. It said it will not reinvest $5 billion in proceeds
next week from maturing Treasury securities in its portfolio,
following the same move this week.
One sign that the Fed itself is not happy with the pace of
activity is that it has begun accepting a wider range of
collateral to back the loans. Fed officials affirmed Friday
that the central bank will now accept asset-backed commercial
paper, ultra-short term corporate IOUs backed by assets ranging
from credit card receivables to mortgages.
The commercial paper market, a vital conduit of financing
for U.S. companies, has shrunk dramatically in the past two
weeks because of worries that assets in the ABCP collateral
pool included tainted subprime mortgages.