Fed keeps banks afloat as money market crisis deepens

By John Parry and Jamie McGeeever

NEW YORK/LONDON (Reuters) - U.S. banks and money managers borrowed a record amount from the Federal Reserve in the latest week, nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression.

The data on borrowing from the Fed closed out another day of high anxiety in global money markets. Key measures of funding stress hit record levels on both sides of the Atlantic as nervous market participants awaited developments from Washington on a $700 billion U.S. financial bailout plan.

Federal Reserve data showed on Thursday the total amount banks borrowed nearly quadrupled the previous record of $47.97 billion per day notched just the week before.

"This looks like the balance sheet of a central bank that is keeping the financial system on life support," said Michael Feroli, U.S. economist with JPMorgan in New York.

Borrowings by primary dealers via the Primary Dealer Credit Facility, and through another facility created on Sunday for Goldman Sachs (GS.N), Morgan Stanley (MS.N) and Merrill Lynch MER.N and their London-based subsidiaries, totaled $105.66 billion as of Wednesday, the Fed said.

The Federal Reserve's lending to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper from money market mutual funds via a new lending facility the Fed announced on September 19, came in at $72.67 billion as of Wednesday.

The Fed designed the loan facility to help money market funds meet huge demands for redemptions from fearful investors over the past week after one U.S. money market mutual fund's value fell below $1 a share, and to foster liquidity in the asset-backed commercial paper markets.

The move followed the U.S. Treasury's action last Friday to set up a temporary guaranty program for the money market mutual fund industry.

Tom Sowanick, chief investment officer at Clearbrook Financial cited "a big increase in borrowings from securities firms which came at a time when the turmoil on Wall Street hit an apex and money market funds came under pressure, so they went to the window to make sure their funds remained stable."

Lending in the "other credit extensions" category to insurer American International Group (AIG.N) and possibly others was $44.57 billion as of September 24, compared with $28.0 billion as of September 17.

"It is stunning how much you see the Fed extending credit all over the place," Feroli said.

"Every facility got used to a large degree, the ABCP facility, the AIG loan, the Primary Dealer Credit Facility and the good old discount window," he said.

"Everywhere you see huge amounts of reserves being put into the system," Feroli said.

LAST RESORT

The data showing the huge reliance of financial institutions on the U.S. central bank came on a day of other extremes within the funding markets for banks and companies.