(Recasts with results from Federal Reserve auction, changes byline, dateline; prior LONDON)
By Kevin Plumberg
NEW YORK, Dec 21 (Reuters) - Banks gave a lukewarm reception to the Federal Reserve’s latest effort to ease credit conditions despite a report on Friday that a fourth large U.S. investment bank received a capital injection from abroad.
Money market rates continued to ease after coordinated central bank cash offers were snapped up this week by banks seeking short-term funds, although Thursday’s $20 billion auction by the Fed found fewer bidders than the first one earlier in the week.
For its part, the European Central Bank pumped $10 billion in 35-day funds to euro zone banks and met solid demand for its second tender of U.S. dollars made through a currency swap with the Fed.
Taken altogether the $40 billion of funds that the Fed has provided this week and the 348.6 billion euros the ECB flooded the market with on Tuesday was seen as helping loosen up lending conditions slowly but steadily.
“If you step back, the purpose of these steps and those taken by the European central banks are to bring down interbank lending rates and those steps appear to be working,” said Avery Shenfeld, an economist with CIBC World Markets in Toronto.
One-month dollar deposit rates were set to post their third consecutive week of declines. The Fed said on Friday its latest auction of 35-day term funds had a stop-out rate, the highest rate that banks bid, of 4.67 percent, below the 4.75 percent discount rate that the Fed directly charges to commercial banks.
“The results indicate that the necessity for longer-term credit was meaningful, but not extreme,” said Pierre Ellis, senior economist with Decision Economics in New York.
Merrill Lynch MER.N may get up to $5 billion in a capital infusion from Singapore state investor Temasek Holdings [TEM.UL], The Wall Street Journal reported.
Temasek is in advanced talks with Merrill, the largest U.S. brokerage, which wrote down $8.4 billion in the third quarter, and its board has given preliminary approval for the investment, the Journal reported, citing a person familiar with the matter.
A developing theme, rooted in the wreckage of the credit crunch, is that Gulf and Asian state investors, awash with cash, have begun moving into large western banks.
Citigroup Inc (C.N) agreed last month to sell a 4.9 percent stake to Abu Dhabi for $7.5 billion, and China agreed this week to pump $5 billion into Morgan Stanley (MS.N), convertible into a 9.9 percent stake.
The Financial Times reported on Friday that a mystery investor that bought a holding in UBS UBSN.VX along with the Singapore government was Saudi Arabian.
UBS sold a roughly 9 percent stake to the Government of Singapore Investment Corporation this month to stop a fresh round of subprime write-downs and a second, smaller stake to a then-undisclosed Middle East investor.
Most interbank money market rates for the euro, dollar and pound fell on Friday, extending the decline made after central banks injected liquidity to help money market tensions.
There is more central bank cash to come.
The Fed said it will continue biweekly auctions from its newly created Term Auction Facility for as long as necessary.
Meanwhile, the bad news from banks continues unabated.
Bear Stearns Co Inc BSC.N posted a big loss on Thursday, taking a $1.9 billion write-down in the fourth quarter, reflecting the reduced value of subprime-related securities.
Morgan Stanley, the second largest U.S. investment bank, on Wednesday reported an additional $5.7 billion mortgage-related write-down in November and said it had written off a total of about $9.4 billion in the fourth quarter.
With official estimates of total losses from the subprime debacle at around $300 billion, investors still fear further shocks. (Editing by Leslie Adler)