Central banks step up efforts to slow credit crisis

NEW YORK/FRANKFURT (Reuters) - Wall Street dealers' demand for cash from the Federal Reserve mushroomed in the latest week, but they were less eager on Thursday to trade in tainted debt for high-quality Treasuries, in a sign that immediate funding needs continue unabated.

The latest evidence of turbulence in global money markets followed actions by European central banks to help lenders who scrambled to meet quarter-end funding needs. The Swiss and British central banks added funds to ease pressure on high interbank lending rates.

In the run-up to the end of the quarter, Wall Street firms favored the Fed's other credit programs, which offer cash rather than low-risk Treasuries for them to borrow money in the open market, analysts said.

Dealers more than doubled their direct borrowing from the Fed to $32.92 billion a day in the latest week from a week earlier, according to Fed data released on Thursday.

Meanwhile, Wall Street demand at the debut of the term securities lending facility auction, or TSLF, paled in comparison. TSLF's bid-to-cover ratio was 1.15, meaning the amount of dodgy mortgage securities pledged by dealers for the $75 billion Treasuries offered by Fed was roughly equal.

Analysts and investors were mildly baffled by the tepid showing, with many concluding that credit tightness while still prevalent may not be as acute as feared.

"The low bid-to-cover would lead me to believe there isn't an urgent need," said Bret Barker, a portfolio manager at Metropolitan West Asset Management in Los Angeles. "Brokers (primary dealers) may have used the PDCF, or primary dealer credit facility, to get cash rather than use this facility (TSLF)."

The latest Fed efforts come in the wake of the near-collapse of Bear Stearns Cos BSC.N and an elevated reluctance by banks to lend to each other given the unknowns of Wall Street's balance sheets.

In Europe, German banking giant Deutsche Bank AG (DBKGn.DE) has issued a veiled profit warning due to the credit crisis, and Switzerland's UBS AG (UBSN.VX) and Credit Suisse AG (CSGN.VX) are expected to announce further losses next week.

MONEY MARKETS STILL TIGHT

Still, the demand for cash remained intense despite the vast amount of funding the Fed and other central banks have injected into the financial system since late last year.

London interbank rates reflected banks' unwillingness to part with cash. Three-month sterling Libor funds edged above 6 percent, the highest since late December, while overnight dollar Libor rates jumped to 3.07750 percent, the highest since the Fed cut rates by 75 basis points on March 18.

The Bank of England lent 13.62 billion pounds ($27.33 billion) at its regular one-week money market operation, up from the prior week's 10.93 billion. Banks bid for almost three times that much, showing the intense demand for cash.

The Swiss National Bank also offered three-month funds to the market, and the European Central Bank said it was ready to provide funds to bring down rates.

"The ECB continues to closely monitor liquidity conditions and notes tensions in short-term rates as the end-of-quarter approaches, notwithstanding the ample liquidity conditions," the ECB said on its Reuters information page ECB35. "The ECB stands ready to provide additional liquidity if needed."

Dealers, banks and other financial institutions whose balance sheets have been hurt by big write-downs have been reticent to make loans and trade among themselves. They are also clamoring for extra cash to meet capital requirements ahead of Monday's quarterly book closing.

And dealers' customers, which include hedge funds, have been scrambling for cash, too. Earlier this month, these players had borrowed heavily to make risky bets and were forced to liquidate their investments to meet margin calls. That resulted in a massive sell-off in stocks, commodities, and agency and mortgage-backed debt.

Thus primary dealers have been tapping all cash sources, including the Fed's PDCF for themselves and their customers.

"The PDCF could supplant the need for the TSLF" because dealer customers "don't want to post collateral, they need the cash...it should allow them to stay leveraged," UBS strategist Mary Beth Fisher said ahead of the TSLF auction.

COMMERCIAL PAPER SECTOR

The reluctance among financial companies to lend has led to bottlenecks in the money market. But some firms have been able to raise capital more easily than others.

For example, U.S. commercial paper market contracted for a fourth consecutive week. The outstanding amount of asset-backed commercial paper, which had been a key funding source for the U.S. mortgage market, fell $2.6 billion, but the amount of unsecured paper issued by financial companies increased by $2.2 billion in the week to Wednesday, according to the Fed.

(Additional reporting by London markets team, Katie Reid in Zurich, Dave Graham in Berlin and Chris Reese, John Parry, Al Yoon, Walden Siew and Jennifer Ablan in New York; Editing by Leslie Adler)