The Fed Pumps More Liquidity

From CNBC

The Federal Reserve announced a series of coordinated actions with other central banks to help ease liquidity pressures in funding markets.
The Fed will expand its securities lending program to loan up to $200 billion of Treasury securities under a new Term Securities Lending Facility (TSLF). It will lend the Treasuries for 28 days rather than the overnight loans of the existing program.
It will also increase its currency swap lines with the European Central Bank and the Swiss National Bank. The ECB swap agreement will increase up to $30 billion from the current $10 billion and the Swiss agreement to $6 billion from the current $2 billion. The increases will be in place through September of this year.
The TSLF, similar to the Term Auction Facility for cash loans, will also operate under an auction format and accept agency debt, agency mortgage-related debt.

The Fed move in essences broadens the type of assets it is willing to take as collateral from banks and expands the period of time it is willing to hold them.
The class of assets now includes mortgages and mortgage-backed paper, but only AAA-rated securities. What was once an overnight arrangement is now extended to 28 days.
In a related move, the Fed raised the amount of money available for its existing currency swap operations with other central banks, most notably the European Central Bank. The move, for instance, gives the ECB more dollars to work with financial institutions in its area of operations that might want to convert Euro-dominated financial instruments into dollars.
"I think the Fed has come to the realization that additional measures are needed in place of just deep fed funds rate cuts, though more cuts are needed," said Thomas Di Galoma, head of U.S. government bonds at Jefferies. "But the previous rate cuts had not been as effective as the Fed hoped. They found out that alleviating the stress in the financial system is needed by taking the mortgages off the books of securities dealers.
"This is a much needed step," he added. "The next stage may be set up a a government-guarantee entity like in the days of the savings-and-loan crisis to buy some of the bad mortgage assets which are not performing."

Here is the text of the Fed's statement:
Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closelyand to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures.
To that end, today the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing specific measures.
The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agencyAAA/Aaa-rated private-label residential MBS.
The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the casewith the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.

In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.
The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion.
--Reuters and AP contributed to this story