WASHINGTON (AFP) — In a rare action aimed at heading off fresh market upheaval, the Federal Reserve has cut a key rate for direct loans to certain financial institutions and said it would offer immediate liquidity to the brokerage system.
The moves, announced Sunday, came as global markets were on tenterhooks following a near-collapse of Wall Street giant Bear Stearns that highlighted a gridlocked financial system.
In Asia, stocks plunged on Monday, oil hit a fresh high and the dollar fell to a new bottom in reaction to the deal.
Tokyo share prices dropped 4.2 percent by lunch with the headline Nikkei index sliding below 12,000 points for the first time since August 2005.
Hong Kong opened 4.1 percent lower, Shanghai declined 2.5 percent, Seoul gave up 2.0 percent, Sydney declined 3.1 percent and Singapore fell 2.8 percent.
The US central bank announced it was cutting by a quarter-point to 3.25 percent its primary credit rate, which is the rate offered at the Fed's discount window for loans to institutions "in sound condition".
The cut, announced as Asian financial markets were set to open, came after a week of market turmoil and was part of "two initiatives designed to bolster market liquidity and promote orderly market functioning," a Fed statement said.
The Fed said it would make liquidity available starting Monday to "primary dealers" including brokerages that are not currently eligible for direct loans from the central bank. The Fed board also extended the maximum time of discount window loans to 90 days from 30 days.
The moves came just two days ahead of a regularly scheduled Federal Open Market Committee meeting where the bank, headed by chairman Ben Bernanke, is widely expected to cut its base rate further in an effort to get credit flowing.
But the Fed has been forced into a series of extraordinary moves amid troubles in various parts of the financial system.
"The Fed obviously didn't think they could wait until Tuesday" to make the announcement, said Robert Brusca at FAO Economics.
"They obviously feared some type of run."
Brusca said one sign of panic was the deal in which JPMorgan Chase agreed to buy Bear Stearns for two dollars a share -- a fraction of its cost a week ago and a pittance compared to a year ago.
"This is not just Bear Stearns," Brusca said. "People have to wonder about other securities firms. Bear Stearns was at 150 dollars a share a year ago and now it was sold for two dollars. You don't have to be an expert to know something is wrong."
A Fed statement said the central bank had authorized the Federal Reserve Bank of New York "to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets" starting Monday, and in place for at least six months.
Financial firms would be able to borrow at the primary credit or discount rate, which was just reduced by the Fed.
The New York Fed said it would accept a wide range of collateral, including mortgage-backed securities in some cases, to help institutions stuck with securities that cannot be traded in a gridlocked financial system.
It was the frozen credit markets that put the squeeze last week on Wall Street financial giant Bear Stearns, which faced a cash crunch and had to get a Fed loan through JPMorgan Chase.
Bear Stearns and many other firms are holding securities backed by subprime mortgages, which in many cases cannot be traded because of the meltdown in the US housing market and a growing wave of defaults.
Bear Stearns shares plunged 47 percent on Friday, setting off fresh worries about the rest of the financial system.
While Bear Stearns officials said the liquidity troubles were the equivalent of a run on the bank, the Wall Street firm had been unable to tap a new credit line announced by the Fed, which is set to take effect on March 27.
Last week, the Fed said it would offer credits to primary dealers though an auction system. Sunday's announcement will make such credit available immediately to banks and securities firms.
The Fed has already slashed its federal funds rate, the base rate for inter-bank lending, to 3.0 percent from 5.25 percent last September, in an effort to ease housing and credit market stress. But that has not been enough to avert worries about a breakdown in the system.
"Today's moves by the Federal Reserve are the desperate acts of failing men. The threat of contagion and wholesale breakdown is on a scale of 1929 is real," said Peter Morici, economist at the University of Maryland who long has been critical of Bernanke.
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