Investment banks are borrowing from Fed

The Lehman Brothers headquarters is seen in New York January 30, 2008. REUTERS/Shannon Stapleton

NEW YORK (Reuters) - Investment banks Goldman Sachs Group Inc GS.N, Lehman Brothers Holdings Inc LEH.N and Morgan Stanley MS.N are testing a new program that allows investment banks to borrow directly from the Federal Reserve, according to people at the banks.

In a bid to stabilize jittery markets, the Fed said on Sunday that it would allow investment banks to borrow from its discount window using a wide range of investment-grade securities as collateral.

Markets were unstable after a run on the bank at Bear Stearns Cos Inc BSC.N forced the investment bank to sell itself to JPMorgan Chase & Co JPM.N at a fire-sale price.

The Fed has also cut the rate at which dealers borrow at the discount window to 2.5 percent from 3.5 percent, in two separate actions this week.

Goldman Sachs plans to test the program sometime this week, a spokesman said. Morgan Stanley Chief Financial Officer Colm Kelleher said his bank has already tested the program, and a spokeswoman for Lehman said the investment bank has also done so.

Erin Callan, CFO at Lehman Brothers Holdings Inc LEH.N, said in a conference call on Tuesday that dealers can borrow from the discount window at attractive terms.

“We would expect that the dealer community will actively begin to access the new program,” Callan said. The program is a statement of confidence to parties that trade with and finance Lehman, and will also allow Lehman to fund more business with clients, she added.

In August, when commercial paper markets were seizing up, the Fed cut the discount rate for commercial banks. Soon after that, the four largest U.S. banks and a major international bank borrowed more than $2 billion total at the discount window, to help remove the stigma of getting short-term financing from the central bank.

Reporting by Dan Wilchins; additional reporting by Chris Reiter and Christian Plumb; editing by John Wallace