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Fed Asks Treasury Dept. for Funds to Backstop Intervention Efforts

By David Cho
Washington Post Staff Writer
Wednesday, September 17, 2008 12:55 PM

The Federal Reserve has requested that the Treasury Department deposit $40 billion with the central bank in an effort to help the Fed continue to stabilize the financial markets and address concerns about whether it is overstretched.

The Fed's extraordinary series of efforts to pump extra funds into the financial system and bail out such firms as American International Group and Bear Stearns with mammoth loans has depleted its store of Treasury bonds. The central bank will use the funds to offset the amount of money it has injected into the markets in its rescue efforts.

"By over-funding itself and placing those funds at the Fed, the Treasury is expanding the Fed's balance sheet in a way that will give the Fed the ability to conduct further operations to support the financial market functioning, should the need arise," said Michael Feroli, an economist with J.P. Morgan Chase.

The department is raising the $40 billion by auctioning bills, known as Treasurys.

Central banks around the world are taking dramatic actions to contain the crisis in the credit markets, pumping more than $280 billion this week into the financial markets, including $70 billion from the Federal Reserve.

Many banks are now charging very high rates to lend to each other, and some institutions have closed their windows altogether -- a sign of how tight borrowing has become. The benchmark overnight lending rate for these banks, called the London interbank offered rate, or Libor, nearly doubled to 6.4 percent, the highest jump on record.

The loss of confidence in the credit markets pushed interest rates on Treasuries lower as investors looked for safe places for their money. This happens because the more investors demand Treasuries, the lower the rates sink. Rates on the three-month Treasury bill, for instance, fell at one point this morning to 0.23 percent, the lowest since at least the 1950s.

Meanwhile, Russia halted trading on its two stock exchanges and injected billions into three former state-owned banks as questions were raised about whether these institutions would remain viable. These banks had accepted a wide range of collateral for loans, including stocks that have fallen more than 50 percent over the past several months.

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