WASHINGTON - Cash-strapped banks took the Federal Reserve up on its offer of $20 billion in short-term loans to help overcome credit problems, but the interest rate wasn't as low as some banks had hoped.
The Fed said yesterday that it had received bids for $61.6 billion worth of loans, more than three times the amount that was made available. The loans carried an interest rate of 4.65 percent, which is slightly less than the 4.75 percent the Fed charges banks on emergency loans through its discount window.
Banks have been reluctant to use the Fed's discount window because of the fear that investors would believe they were having trouble getting funds in a normal manner.
There were 93 bids for the government loans, the Fed said. Each bank could submit up to two bids. The auction for the 28-day loans was conducted Monday, and the results were released yesterday.
Asked how the first auction fared, T.J. Marta, a fixed-income strategist at RBC Capital Markets Corp., replied: "I was standing next to two seasoned traders, and one thought this auction was fantastic and another one thought it was horrible."
Marta said he felt it was "unsatisfying" because investors had thought the rate on the loans would have been lower, about 4.30 percent or 4.40 percent, rather than 4.65 percent.
"There was a hope that things really weren't that bad and that the market would have been able to bid down the Fed and take the money at a cheaper rate," Marta said. "The fact that the market wasn't really willing to was evidence of the stress."
A second auction was scheduled for today, offering banks a chance to get a slice of another $20 billion in 35-day loans. The Fed said it would conduct two more auctions in January, and then assess whether the process was worth continuing.
The Fed said last week that it would lend money to banks to help them over the credit hump. The global credit crisis - which started last spring with rising defaults on U.S. home mortgages, especially by borrowers with poor credit histories - has made banks reluctant to lend to one another. That, in turn, crimps lending by the banks to individuals and businesses.
The smooth flow of credit is the economy's lifeblood. It permits individuals to finance big-ticket purchases, such as homes and cars, and helps businesses to expand operations and hire workers.
The Fed's actions are part of a global effort in which other central banks also are acting to curb the credit crisis.