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Fed Takes Broad Action to Avert Financial Crisis
This has been a remarkably fast fall for a titan of Wall Street. It took 85 years to build Bear Stearns and four days for it to dissolve. But the troubles for Bear Stearns may not be over. Shareholder lawsuits could be filed against the firm if investors suspect Bear Stearns officials knew Friday that bank's value practically evaporated but failed to disclose that information publicly.
The trio of Fed actions aim to ensure that other top Wall Street firms do not experience a similar bank run.
The central bank will now make it possible for investment banks to borrow money as long as they put up collateral. The Fed in effect is offering to be a lender of last resort for 20 major Wall Street firms, a role it has previously played only for commercial banks.
Since the central bank was created in 1913, it has served as a lender of last resort for ordinary banks, allowing them to post high-quality loans at a "discount window" in exchange for cash.
Last night, it announced a new provision that will in effect do the same for major investment firms. Starting today, and lasting for at least six months, this new operation will allow "primary dealers," which are 20 major Wall Street firms, access to cash in exchange for assets in which the market is not currently functioning.
And by lowering the discount rate, borrowing that money will be cheaper for both commercial banks using the discount window and investment firms using the new initiative.
The reduction in the discount rate -- a quarter percentage point cut to 3.25 percent -- will lower the rate banks are charged for emergency loans. That rate does not directly affect the cost for businesses and consumers to borrow money.
The five Fed governors voted unanimously to approve the actions, stating that the moves were designed to "bolster market liquidity and promote orderly market functioning." They are the latest in a series of unconventional actions taken by the central bank in the past six months.