Washington: The Federal Reserve and the US Treasury, armed with new emergency powers, announced measures on Monday to tackle a rapidly escalating financial crisis as panicked investors fled stock markets.
The central bank and Treasury said they were studying the possibility of making unsecured loans in an effort to keep credit flowing in the financial system.
Treasury officials said they would seek bids by Wednesday to manage a massive bailout plan for the financial sector.
The Federal Reserve said it would start to pay interest on bank deposits and expand bank loans to up to $900 billion by year-end in a bid to increase liquidity.
A $700 billion financial sector bailout enacted Friday by President George W Bush accelerated the launch of Fed interest rate payments on deposit balances to October 1, four years ahead of a date set in a 2006 law.
Treasury Secretary Henry Paulson tapped Neel Kashkari, an assistant Treasury secretary for international economics and former colleague of Paulson’s from Goldman Sachs, to head the Office of Financial Stability, including the Troubled Assets Relief Program (TARP) created in the emergency legislation last week.
Kashkari, 35, a former Vice President at Goldman Sachs’ San Francisco office, used to work as a NASA aerospace engineer.
The Treasury also announced it was urgently seeking asset managers for the bank bailout program. After the stock markets closed, it launched the bidding for managers of troubled mortgages and mortgage-backed securities.
The Treasury said it was looking for managers in three areas: home mortgages, home mortgages that could be bought from banks, and soured mortgage-related securities that could be bought from financial firms.
In a sign of the urgency of the situation, the Treasury gave financial institutions a deadline of Wednesday at 5:00pm (2100 GMT) to submit bids.
Stock markets plummeted Monday after the massive US financial rescue package failed to quell jitters that the global economy was heading for a recession.
“The credit crisis is spreading, with the European banking sector now also under pressure. Though global central banks have injected massive amounts of liquidity, confidence has failed to improve. Banks are reluctant to lend to one another, which results in higher borrowing costs,” said Ryan Sweet at Economy.com.
The Fed said its new ability to pay interest on reserve balances would give it “greater scope to use its lending programs to address conditions in credit markets” while also maintaining the federal funds rate close to its target, currently at 2.0%.
To pump more liquidity into the choked credit system, the Fed also announced it was “substantially” increasing the size of the Term Auction Facility (TAF) auctions available to banks, beginning with Monday’s auction of 84-day funds.
The Fed said it will increase its TAF credit lines, “so that $900 billion of TAF credit will potentially be outstanding over year end.”
The Treasury said it was working, in cooperation with the central bank and the Federal Deposit Insurance Corp., with “market participants and regulators globally to address the current challenges and restore confidence and stability to financial markets around the world.”
With banks unwilling to lend to each other amid the turmoil, virtually seizing up credit flows, both the Treasury and the Fed announced they were “consulting with market participants on ways to provide additional support for term unsecured funding markets.”
The Treasury announced separately it would issue $100 billion in additional short-term securities to help finance the Fed emergency measures.