UPDATE 1-Banks snap up Fed cash at record $188 bln per day
Thu Sep 25, 2008 5:16pm EDT


By John Parry

NEW YORK, Sept 25 (Reuters) - U.S. financial institutions borrowed a record $187.75 billion per day on average directly from the Federal Reserve in the latest week, showing the central bank went to extremes to keep the financial system afloat amid the biggest crisis since the Great Depression.

Federal Reserve data showed on Thursday the total amount borrowed nearly quadruples the previous record of $47.97 billion per day notched just the week before and comes as the Bush administration and U.S. lawmakers work on hammering out an agreement on a $700 billion rescue package for the financial system.

"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.

Primary credit borrowings averaged a new record $39.36 billion per day in the latest week ended Sept. 24 compared with the previous record of $21.60 billion a week ago.

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 Sept. 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 Treasury's action on 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."

Proceeds in an account at the Fed from a special mechanism set up on Sept. 17 enabling the Treasury to sell cash management bills to raise money for the U.S. central bank to use in a costly bid to rescue financial institutions were $159.81 billion as of Sept. 24, the Fed said.

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 Sept. 24, compared with $28.0 billion as of Sept. 17. (Additional reporting by Jennifer Ablan and David Lawder; editing by Gary Crosse)