The Federal Reserve announced Wednesday that it was lending $20 billion to banks in the first of four special auctions designed to help alleviate the credit crunch on Wall Street.The Fed said that it received requests for $61.6 billion in loans from 93 bidders – illustrating strong demand by banks that need short-term funds. The winning bidders will receive their loans, which will mature in 28 days, on Thursday.
Initially, stocks moved modestly higher Wednesday following the release of the auction results but headed lower in early afternoon trading. The price of bonds fell at first but wound up rallying later in the morning, pushing the yield on the benchmark 10-year U.S. Treasury note down to 4.09 percent. Bond yields and prices move in opposite directions.
One market expert said the auctions will do little to ease the pain in the financial markets.
“This is a crisis of confidence, not of liquidity or rates. The problem is that people made bad loans this year. There’s nothing the Fed can do to fix this. All they can do is try and reduce anxiety,” said Barry Ritholtz, director of equity research for Fusion IQ, an asset management firm based in New York.
The Fed last week announced the auction plan in conjunction with central banks in Canada and Europe. A senior Fed official said at the time that the central bank was hoping banks that needed funding would be less hesitant to ask for money through the new anonymous auction process than they were to borrow directly from the Fed.
