NEW YORK — Bank stocks spiked Tuesday after the Federal Reserve offered to swap $200 billion of ultra-safe Treasury bonds for some of the troubled investments roiling Wall Street.
The offer is designed to halt a wave of selling and make it easier for banks to raise cash.
“It takes a lot of the pressure off the short-term funding side of the major brokers,” said Sanford Bernstein analyst Brad Hintz, who used to be chief financial officer of Lehman Brothers Holdings Inc. “What the Fed is doing is attempting to break the back of uncertainty in the repo market and ensure that no major financial institution goes down.”
Over the last few months, lenders have acquired a distaste for risk and uncertainty, and numerous markets where banks typically raise cash have frozen up.
But it is still easy to borrow money using Treasury debt as collateral because the U.S. government is considered the most creditworthy borrower in the world. By temporarily trading no-risk Treasurys for mortgage bonds that have become toxic on Wall Street, the Fed is giving banks collateral they can use to borrow money.
Brokers are entitled to exchange any bond backed by mortgages issued by a government-sponsored company like Fannie Mae or Freddie Mac. They can also exchange bonds from other issuers if they are rated “AAA.”
While the Fed is not offering to trade for low-grade or subprime debt, LibertyView Capital Management president Rick Meckler said by devising more creative ways to inject liquidity into financial markets, the Fed will hopefully relieve some of the pressure on lenders to sell their assets.
Many lenders still feel compelled to dump their investments to buttress their finances or repay their own lenders. This selling has yanked down prices for many kinds of investments, Meckler said, which in turn forced more selling.
“This is an attempt to break that cycle,” he said.
