Fed extends securities firms’ loan privileges

Focused on getting the nation’s credit gears working smoothly again, the Federal Reserve is letting Wall Street firms draw emergency loans into next year and giving financial companies more options to help them overcome credit problems.

The Fed’s announcement Wednesday marked its latest effort to get credit flowing more freely. The global credit crisis has hobbled the U.S. economy, already reeling from a housing meltdown.

With financial companies racking up multibillion-dollar losses on soured mortgage investments and credit problems spreading to other areas, firms are hoarding cash and clamping down on lending. That has crimped spending by consumers and businesses, which in turn has weighed on the national economy -- a vicious cycle the Fed wants to break.

To that end, the central bank announced that investment houses can now tap it for quick cash through Jan 30. Originally the program, started on March 17, was supposed to last until mid-September.

Another program, in which investment firms can temporarily swap more risky investments for super-safe Treasury securities, also will continue through Jan. 30, the Fed said. And it also will let commercial banks bid on cash loans that last longer -- 84 days, besides the 28-day loans now available.

The Fed took these steps in light of “fragile circumstances in financial markets.”

This week, Merrill Lynch & Co. announced plans to write down an additional $5.7 billion tied to bad mortgage debt, raising fears that other banks and financial firms will follow.

Merrill said it would sell repackaged mortgage-backed securities for just $7 billion -- only a few weeks after they had been valued at $31 billion.

The decision gave the securities a current value of about 22 cents on the dollar and set a new, low benchmark that other Wall Street banks -- including Citigroup Inc. and Lehman Bros. Holdings Inc. -- might adopt when valuing their own distressed investments.

Now that inflation worries have forced the Fed to halt a campaign of interest rate cuts, it will be looking for other tactics -- such as those announced Wednesday. The Fed is expected to leave rates steady at next week’s meeting.