Fed Extends Lending Facilities

The Fed announced it was extending investment banks' access to the discount window (the primary dealer credit facility) until January 30,2009.  The program was originally set to expire in September.  The Fed is also extending the Term Securities Lending Facility through January.  The TSLF has provides $200 billion in 28-day loans of Treasuries in return for other unsightly types of collateral.  The Fed is also authorizing auctioning of options of up to $50 billion on the TSLF for exercise in advance of periods where funding pressures are elevated (i.e. quarter ends).  The Fed will begin auctioning loans to commercial banks lasting 84 days in addition to the Term Auction Facility, which will begin August 11 and will alternate with the $75 billion in existing 28-day loans.  The total credit under that program will be $150 billion.  Furthermore, the Fed is increasing the size of a swap line with the ECB due to significant demand for dollar funding from the Fed.  Detailed explanations of all of these facilities (in addition to a very handy mortgage map) can be found here at the New York Federal Reserve's website.  In summary, funding problems persist in the money markets and the Fed believes it has to be a lender of last resort to ward off potential liquidity issues that could lead to banking failures.  That is the optimistic viewpoint.  The pessimists would say that the Fed is taking on the funding risks of a fragile US banking system.  If the liquidity issues wind up becoming solvency issues then the Fed and US taxpayer is on the hook.  I'll let you decide which side of the fence you land on this debate.