Fed injects $200bn as credit markets deteriorate

by Gill Montia

Story link: Fed injects $200bn as credit markets deteriorate

On Friday of last week, the US Federal Reserve provided $200 billion in emergency funding to the money markets.

The central bank referred to a “rapid deterioration” in the credit markets during the latter part of last week, prompting it to provide a number of cash injections to shore up the balance sheets of banks and other financial institutions.

The events mark the latest phase of the credit crisis, which has been worsening since last June, when the US sub-prime mortgage market began to collapse.

The crisis certainly deepened with the news last Friday that investment bank, JPMorgan, had issued Thornburg with a “default notice”, leaving the US mortgage lender on the brink of bankruptcy.

Thornburg’s assets had declined to a point where it was unable to meet a $28 million margin call, that is to say the securities bought with money borrowed from JPMorgan had decrease in value past a certain point.

The move prompted other banks to make margin calls on loans and substantially raise interest rates, with the result that a number of hedge funds, including Carlyle Capital Corporation, are thought to be on the brink of collapse.

In its attempt the calm the markets, the Federal Reserve has taken the unprecedented step of accepting mortgage-backed assets as collateral from the banks, for fresh loans.