Wall Street's biggest brokers have already borrowed tens of billions of dollars from the Federal Reserve, rushing to get hard-to-sell mortgage bonds off their battered balance sheets.
The Fed reversed decades of policy in the wake of Bear Stearns' collapse on Sunday and began to allow securities firms to borrow directly from its so-called "discount window", using unloved mortgage-backed securities as collateral. The discount window had previously been available only to commercial banks.
Some $28.8bn had been borrowed from the discount window as of Wednesday, the Fed said last night. Several major Wall Street institutions – Goldman Sachs, Lehman Brothers and Morgan Stanley among them – are known to have made use of the facility to swap their hard-to-sell bonds for cash.
Mortgage-backed assets have fallen sharply in value, damaging Wall Street balance sheets and causing a sharp contraction in the amount of lending between institutions.
The stock market rally this week, which accelerated in the final hours of New York trading yesterday, has been fuelled by relief that the Fed is gobbling up large amounts of risky securities.
And in another example of its increasingly expansive role, the Fed said yesterday it had decided to accept an even wider array of risky collateral for the $75bn of loans it plans to dole out at an auction next week. Commercial real estate loans – whose value has recently been called into question – will now be accepted.
The Federal Reserve's opening of the discount window to investment houses produced massive borrowing totalling $28.8bn as of Wednesday.
The primary dealer credit facility, which offers discount window loans to investors, was one of two categories added to the Fed's weekly release.
The second additional category, listed as "other credit extensions", includes a portion of the Fed's $30bn offer to facilitate the buyout of Bear Stearns by JP Morgan Chase. The balance for this category totalled $5.529bn in the week ending Wednesday.
Banks also increased their borrowing from the discount window as total primary credit increased to $120m as of Wednesday. That follows a three-week drop-off in borrowing.