Fed to Make $200 Billion Available To Lenders

The problems are the latest wave of a crisis in debt markets that began in August and reappeared again in November and late February. This crisis is one major factor in a pullback by consumers and businesses that has driven the economy to the brink of recession, or possibly over it.

The jobs report yesterday marked the third straight month of disappointing results. The losses were heaviest in the construction sector, which shed 39,000 positions, and manufacturing, which fell by 52,000 jobs. But even sectors that have been sources of job growth are cutting back. Retailers cut 34,100 jobs, probably reflecting soft consumer spending. Financial companies cut 12,000 positions.

And in a particularly worrisome sign, temporary help services cut 27,600 jobs. Often, companies cut temporary workers before shedding permanent jobs, making that category a leading indicator for what is to come.

The latest problems in the credit markets are the result of the vast amount of debt that investors have assumed in recent years to finance their activities. Now, investors are being forced to unwind that debt as lenders get anxious and demand that hedge funds and other institutions come up with cash.

These are margin calls, no different from what happens to an individual investor when he buys stocks with borrowed money and the value of the stocks declines. For example, Carlyle Capital, a fund managed by the District-based Carlyle Group, faced margin calls this week from its lenders. Unable to come up with enough cash, the fund defaulted.

These margin calls are prompting investment funds to unload various kinds of debt to raise money, and often the only debt they can find a buyer for is the safest, such as bonds issued by municipalities. The result is higher mortgage rates, higher borrowing costs for state and local governments, and higher rates for companies.

"Margin calls make it difficult for banks to borrow money, for corporations to borrow money and for homeowners to borrow money," said Robert Nelson, a managing analyst at Thomson Financial. "That's going to be the theme through the rest of the year: tight lending."

Mortgage lenders rely on Fannie Mae and Freddie Mac for the money they lend to home buyers. Financial markets are now signaling that investors believe even the historically safe securities issued by Fannie and Freddie are increasingly at risk of default.

Leaders of the Federal Reserve view this to be a market anomaly rather than a reflection of a true increase in the risk of the loans. The Fed is trying to restore stability to that market by offering major financial institutions a 28-day "repurchase agreement," under which the Fed would temporarily hold their securities in exchange for cash.

The same crisis has caused rates on municipal bonds, those issued by state and local governments, to rise above those issued by the federal government. That is highly unusual. Municipal bonds are tax free, and their issuers can typically offer lower interest rates and still attract buyers.

Borrowing costs have also increased for large corporations and more so than in previous periods of markets stress. In recent months, the interest rate premium paid by low-risk, AA-rated firms has increased 1.2 percentage points, according to analysis by Macroeconomic Advisers, a forecasting firm. By contrast, during a world debt crisis in 1998, this rate only rose by 0.3 percentage points. After the Sept. 11, 2001, terrorist attacks and subsequent corporate scandals, it was up 0.2 percentage points.

Besides the repurchase agreements, the Fed has expanded a program of "term auction facilities" that allows financial institutions to put up collateral in exchange for cash, aiming to return liquidity to these markets.

"The Fed has been running around putting fingers in dikes," said Diane Swonk, chief economist of Mesirow Financial. "Without that, the dike would have imploded, and water would have been spilling in."

Staff writer Tomoeh Murakami Tse in New York contributed to this report.