Wall Street woes force U.S. to seek cash for Fed

By Glenn Somerville and Jamie McGeever

WASHINGTON/LONDON (Reuters) - The U.S. government on Wednesday sought to raise $40 billion in a bid to boost the Federal Reserve's financial firepower to fight a crisis of confidence that has rocked Wall Street and beyond.

Other central banks also battled to restore confidence in financial markets as share prices gave up brief gains made on news of the U.S. government bailout of crippled insurer AIG and the cost of short-term borrowing remained high in interbank markets.

The U.S. Treasury Department said it was selling $40 billion of cash management bills -- effectively new debt -- at the request of the Federal Reserve to help the central bank "better manage their balance sheet," a Treasury statement said.

Separately, the Treasury said it would auction on Thursday $60 billion of cash management bills in two equal tranches of 20- and 76-day maturities.

The Treasury's announcement of a new "supplementary financing program" came hours after the Fed offered up to $85 billion in loans to rescue American International Group -- a move that gives the Fed a near 80 percent stake in the company.

Analysts expressed concern that more debt was being placed on the government's balance sheet.

"This indeed amounts to turning on the printing presses to make money," said Sung Won Sohn, an economics professor at California State University, Channel Islands.

Asian central banks plowed extra liquidity into short-term funding markets, though many central banks in Europe took their foot off the pedal amid signs of a respite from the sharp surges in short-term borrowing costs in the past two days.

The Bank of England said it would allow banks an extra three months to swap risky assets for government paper, extending a scheme that was set to close next month because of the latest turmoil in financial markets.

Wall Street dealers scrambled for the Treasuries offered by the Fed in three auctions on Wednesday, submitting record bids to borrow $35 billion of Treasury issues for 28 days from the Fed's Term Securities Lending Facility.

Dominique Strauss-Kahn, head of the International Monetary Fund, said there could well be more trouble in what former U.S. Treasury Secretary Robert Rubin dubbed "the worst crisis since the 1930s."

"The consequences for some financial institutions are still in front of us," Strauss-Kahn told reporters in Saudi Arabia.

Investors appeared to agree with that analysis.

CONFIDENCE BLEEDS

Financial markets hemorrhaged confidence through the U.S. trading day, with a positive open for stocks -- after a relief rally in Asia and Europe in the wake of Tuesday's late-night AIG deal -- transformed into a three-year low Wall Street close, as the three major indexes shed more than 4 percent.