Thu Sep 25, 2008 6:13pm EDT
By John Parry and Jamie McGeeever
NEW YORK/LONDON (Reuters) - U.S. banks and money managers borrowed a record amount from the Federal Reserve in the latest week, nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression.
The data on borrowing from the Fed closed out another day of high anxiety in global money markets. Key measures of funding stress hit record levels on both sides of the Atlantic as nervous market participants awaited developments from Washington on a $700 billion U.S. financial bailout plan.
Federal Reserve data showed on Thursday the total amount banks borrowed nearly quadrupled the previous record of $47.97 billion per day notched just the week before.
"This looks like the balance sheet of a central bank that is keeping the financial system on life support," said Michael Feroli, U.S. economist with JPMorgan in New York.
Borrowings by primary dealers via the Primary Dealer Credit Facility, and through another facility created on Sunday for Goldman Sachs (GS.N:Quote, Profile, Research, Stock Buzz), Morgan Stanley (MS.N: Quote,Profile, Research, Stock Buzz) and Merrill Lynch (MER.N: Quote, Profile,Research, Stock Buzz) and their London-based subsidiaries, totaled $105.66 billion as of Wednesday, the Fed said.
The Federal Reserve's lending to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper from money market mutual funds via a new lending facility the Fed announced on September 19, came in at $72.67 billion as of Wednesday.
The Fed designed the loan facility to help money market funds meet huge demands for redemptions from fearful investors over the past week after one U.S. money market mutual fund's value fell below $1 a share, and to foster liquidity in the asset-backed commercial paper markets.
The move followed the U.S. Treasury's action last Friday to set up a temporary guaranty program for the money market mutual fund industry.
Tom Sowanick, chief investment officer at Clearbrook Financial cited "a big increase in borrowings from securities firms which came at a time when the turmoil on Wall Street hit an apex and money market funds came under pressure, so they went to the window to make sure their funds remained stable."
Lending in the "other credit extensions" category to insurer American International Group (AIG.N: Quote, Profile, Research, Stock Buzz) and possibly others was $44.57 billion as of September 24, compared with $28.0 billion as of September 17.
"It is stunning how much you see the Fed extending credit all over the place," Feroli said.
"Every facility got used to a large degree, the ABCP facility, the AIG loan, the Primary Dealer Credit Facility and the good old discount window," he said.
"Everywhere you see huge amounts of reserves being put into the system," Feroli said.
The data showing the huge reliance of financial institutions on the U.S. central bank came on a day of other extremes within the funding markets for banks and companies.
Key measures of U.S. dollar funding strains hit record levels as nervous market participants awaited developments from Washington on a $700 billion U.S. financial bailout plan.
The inter-bank premium for borrowing three-month dollars over anticipated official policy rates, or Overnight Index Swaps, known as the Libor/OIS spread, blew out to 200 basis points, while the cost of borrowing euros and sterling also jumped.
That dollar Libor/OIS spread was around 164 basis points on Wednesday, and around 80 basis points at the start of September.
Yet late in the New York day, market participants' hopes of an imminent passage of the $700 billion government bank bailout dragged some gauges of risk aversion including interest rate swap spreads, back from the brink.
The U.S. commercial paper market also shrank dramatically, marking the biggest weekly contraction in a year, Fed data showed on Thursday, as the escalating global credit crisis shook investors' confidence in all but the safest instruments issued by the U.S. government.
For the week ended September 24, the size of the U.S. commercial paper market, a vital source of short-term funding for daily operations at many companies, shrank by $61.0 billion to $1.702 trillion, the lowest level since early 2006 Federal Reserve data showed.
"The declines add to the urgency for fixes to the credit crisis," wrote Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co. in New York in an email note.
The closely-watched TED spread, meanwhile, was last indicated around 430 basis points on Reuters screens, edging back up toward the near 500 basis points struck last week, the widest in over a quarter of a century.
The three-month sterling Libor/OIS spread, meanwhile, widened to almost 160 basis points, more than doubling since the start of the month.
These spreads are seen as a key indicator of financial market stress and risk aversion, reflecting the true cost of funding for banks and financial instututions. Some 60 percent of corporate lending is tied to London interbank offered rates (Libor), according to Credit Suisse.
(Additional reporting by Jennifer Ablan, Richard Leong and David Lawder; editing by )
(Reporting by John Parry and Jamie McGeever)