WASHINGTON - Cash-strapped banks took the Federal Reserve up on its offer of $20 billion in short-term loans to help them overcome credit problems, but the interest rate wasn't as low as some had hoped.
The central bank yesterday said 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, 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 will believe they are having trouble getting funds in a normal manner.
There were 93 bidders, the Fed said. The auction for the 28-day loans was conducted Monday.
Asked how the first auction fared, T.J. Marta, a fixed-income strategist at RBC Capital Markets, replied: "I was standing next to two seasoned traders and one thought this auction was fantastic and another one thought it was horrible." For his own part, Marta said it was "unsatisfying," because investors had thought the rate on the loans would be lower, around 4.3 or 4.4 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 explained. "The fact that the market wasn't really willing to was evidence of the stress."
A second auction will be conducted today, offering banks another 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.
Ken Mayland, of ClearView Economics, said the auctions should help bolster confidence among edgy investors, banks, and other players.
The Fed announced last week that it was creating an auction facility that would give cash-strapped banks a new way to get short-term loans from the central bank to help them over the credit hump. A global credit crisis has made banks reluctant to lend to each other, which can crimp lending to individuals and businesses.
The smooth flow of credit is the economy's lifeblood. It permits people to finance big-ticket purchases, such as homes and cars, and helps businesses to expand operations and hire workers.
