Treasury selling debt to help Fed

WASHINGTON (Reuters) - The U.S. Treasury Department quickly put a new special financing facility to work on Wednesday, raising money for the Federal Reserve to use in a costly bid to rescue crumbling U.S. financial institutions.

Just minutes after unveiling the financing program, Treasury said it would sell $40 billion of cash management bills -- essentially a fresh batch of debt -- on Wednesday at the U.S. central bank’s request as part of what a Treasury official called an attempt to “help them better manage their balance sheet.”

Auction results were expected in early afternoon.

Treasury’s announcement of a new “supplementary financing program” came hours after the Fed offered up to $85 billion in loans to rescue crippled insurer American International Group (AIG) -- a move that gives the Fed nearly an 80 percent stake in the company.

The decision was only the latest in a series of dramatic moves since March by Treasury and the Fed to prop up financial companies reeling under the impact of a deepening credit crisis, and put the taxpayer even more at risk.

By rough estimate, the various bailouts and loan pledges so far tally more than $900 billion, including a promise by Treasury earlier this month to inject up to $200 billion in Fannie Mae and Freddie Mac after it seized control of the two mortgage financing companies.

Treasury said its new financing program was being established at the specific request of Fed. Treasury said it was intended to be temporary, but offered no guess about how long it will last.

“The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing programs, which will provide cash for use in the Federal Reserve initiatives,” Treasury said.

Analysts said the program was clearly designed to take advantage of an ongoing flight-to-quality by shell-shocked investors who are eager to buy short-term debt guaranteed by the U.S. government while they sit out market turmoil.

“There’s very strong demand for the shortest term and most liquid securities and those are Treasury bills so that’s basically what’s going on in the bill market,” said Michael Moran, chief economist for Daiwa Securities America in New York.

A Treasury Department official turned aside questions whether the Fed’s balance sheet was becoming so strained that it had to ask the Treasury to raise money for it.

“They have different tools that they can use, but we just want to make sure that in terms of having the necessary tools, this is an option that they can use,” the official said.

Reporting by Glenn Somerville and David Lawder; additional reporting by Ellen Freilich, Editing by Chizu Nomiyama