Federal Reserve Chairman Ben Bernanke has gone from scapegoat to savior on Wall Street in the wake of the unprecedented global move to inject liquidity into the credit markets.
The surprise Fed maneuver – coordinated with other central banks – was a highly creative, albeit belated, response to the long string of pleas from Wall Street pundits for the Fed to “do something.”
“Everyone had somehow forgotten in recent years that along with setting interest rate policies, the Fed has another role, as the lender of last resort,” said Neil Wolfson, president of Wilmington Trust Investment Management.
“They have now exercised that role.”
The Fed can’t solve the credit crunch by forcing financial institutions to lend money to borrowers, from homebuyers all the way up the feeding chain to the giant buyout firms. But policymakers can make it easier by removing some of the risk involved – and that’s what their initiative tries to accomplish.
Further boosting the market’s pre-open mood was the news that the Fed wasn’t acting alone. Four other central banks, including the powerful European Central Bank, along with the Canadian and Japanese counterparts, joined with the Fed in announcing related measures to boost liquidity in their own markets, signaling that concern about the health of the US economy is truly global.
The Fed announced it will agree to lend Treasury securities to financial institutions in exchange for the battered mortgage securities, including those sold by Fannie Mae and Freddie Mac. That will give institutions like Citigroup and Bear Stearns access to liquid and ultra-secure government bonds, which they can then exchange for cash to bolster their balance sheets.
“Typically, when the Fed lends, it’s on an overnight basis; here they are lending for 28 days, and may extend that period,” said Wolfson.
“The thought in the markets is that they have bought themselves at least a month to find other ways to resolve the underlying problems in the economy and the markets,” he added.
Market participants are hoping that the Fed’s stepped-up commitment to combating the strains placed on the financial markets and the economy by the credit-market crisis will be enough to reduce the level of uncertainty among investors.