WASHINGTON The U.S. Federal Reserve on Friday announced more steps to aid battered markets, including opening its discount window to financial institutions to enable them to purchase certain assets from money market funds.
"One initiative will extend non-recourse loans at the primary credit rate to U.S. depositary institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds," the Fed said in a statement.
"This should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity in the ABCP market and broader money markets," it said.
The U.S. central bank's move follows news earlier on Friday from the U.S. Treasury that it had set up a temporary guaranty program for the mutual fund industry. The measures were the latest in a series of dramatic steps to calm a spreading panic in credit markets following the record bankruptcy of Lehman Brothers Holding Inc LEH.N and the government bailout-out of American International Group (AIG.N).
The Fed also announced more help for market in agency debt, which includes paper issued by mortgage finance giants Fannie Mae and Freddie Mac, which were seized by the government on September 7.
"To further support market functioning, the Federal Reserve also plans to purchase from primary dealers federal agency discount notes, which are short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks," the Fed said.
Money market mutual funds hold an estimated $234 billion of asset-backed commercial paper, roughly 12 percent of their assets, a Fed official who briefed reporters on condition of anonymity said.
Money market mutual funds hold an estimated $69 billion in government-sponsored enterprise discount notes, the official said.
The Fed has not been specific about how much of those loans or purchases it will finance.
The U.S. central bank also temporarily changed leverage and risk-based capital rules for banks and bank holding companies to make it easier for them to participate in the program.
The rule "would provide a temporary limited exception from the Board's leverage and risk-based capital rules for bank holding companies and state member banks," the Fed said in a statement.
The Fed said the special facility would end after January 30, 2009.
Only ABCP issues denominated in dollars and issued by a U.S. issuer are eligible for the program, the U.S. central bank said. All U.S. banks and U.S. branches of foreign banks will be able to borrow under the facility, the Fed added.
(Additional reporting by Mark Felsenthal; Editing by Leslie Adler)