central banks deny plan to buy securities

Central banks deny plan to buy securities

March 24, 2008

THE US Federal Reserve says it is not discussing co-ordinated purchases of mortgage-backed securities (MBS) with other central banks.

"The Federal Reserve is not involved in discussions with foreign central banks for co-ordinated buying of MBS," a senior Fed official said.

The Financial Times reported on its website on Friday that "central banks on both sides of the Atlantic are actively engaged in discussions about the feasibility of mass purchases of mortgage-backed securities as a possible solution to the credit crisis".

The newspaper said the Bank of England appeared the most enthusiastic to explore the idea; the Fed was open in principle but only as a last resort; and the European Central Bank appeared least enthusiastic. A Bank of England spokesman said: "All central banks, including the Bank of England, have been looking at how to ease the strains in their banking markets. The bank (of England) is not, however, among those reported today to be proposing schemes that would require the taxpayer rather than the banks to assume the credit risk. We can, however, confirm that we have been examining a number of other options, but it is too early to go into any detail."

The Fed has already announced several initiatives to provide additional liquidity to the MBS market, including expanded, longer-term repo operations in which bond dealers pledge MBS to borrow short-term funds from the Fed. Only MBS backed by the federal Government or by the federally sponsored mortgage agencies Fannie Mae and Freddie Mac could be pledged in such operations. The Fed has also unveiled a facility to lend dealers up to $US200 billion ($223 billion) in Treasury bonds, starting on March 27, in return for a like amount of both agency-backed and other ("private label") MBS for up to 28 days.

Finally, yesterday the Fed announced a new facility under which bond dealers could borrow directly from the Fed's discount window with a wide variety of investment-grade collateral, including agency and private label MBS and corporate bonds. Some on Wall Street have pressed the Fed to go further and purchase MBS outright.

The Fed has the legal authority to purchase agency MBS but not private-label MBS.

It has been reluctant to do so since that could distort the fundamental prices of such securities. Its recent steps were aimed at stopping a crippling aversion by investors to holding any MBS irrespective of their fundamental value. But the Fed has lent its moral support to other initiatives to boost demand for MBS. Fed chairman Ben Bernanke has called on Fannie and Freddie to issue additional capital, which would expand their ability to buy or guarantee MBS. He has also called for an expansion of the Federal Housing Administration's authority to guarantee troubled mortgages.

http://www.theaustralian.news.com.au/