Federal reserve buys Tresurys and bad loans

Fed not distracted by circus over bonuses
Commentary: FOMC ramps up credit easing in face of worsening economy
By MarketWatch
Last update: 2:48 p.m. EDT March 18, 2009
Comments: 893
WASHINGTON (MarketWatch) -- The grownups in Washington aren't about to let the latest political and media circus over ill-gotten bonuses distract them from saving this economy.
The Federal Open Market Committee acted very boldly Wednesday, promising to crank up the money supply until the economy starts breathing on its own again.
The FOMC said it would buy up to $300 billion in longer-term Treasurys over the next six months. And it said it would boost its purchases of mortgage-backed securities and agency debt, all in a bid to get credit flowing through the economy again. See full story.
All told, the FOMC committed to boost its arsenal by $1.15 trillion, doubling in one pen stroke the amount of "credit easing" it's already accomplished.
The Fed's move should lower interest rates for most borrowers, especially for homeowners and for businesses. Another wave of refinancings should help millions of homeowners lower their monthly payments.
Why would the Fed want to push more money into the economy? Simply, the outlook for the economy has deteriorated since January. The committee no longer expects a recovery later this year; at least, it's not willing to put that guess into its post-meeting statement.
Still, the Fed thinks that the most likely outcome is a "gradual resumption of weak growth." Somehow, the stock market has found some solace in that tepid endorsement.
The global economy is slumping and the U.S. economy is weak.
It's no time for half measures, or grandstanding about how unfair it is that a few hundred people are getting bonuses.
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Stocks Close Higher; Fed's Tsy-Buying Plan Helps
By Rob Curran
Last update: 5:25 p.m. EDT March 18, 2009
Comments: 30
(Updates with company information, beginning on the tenth paragraph.)
NEW YORK (MarketWatch) -- The Federal Reserve has resorted to the printing press, and stock traders hailed the move with a rally.
The Federal Reserve's decision to bring down interest rates by buying long-term Treasurys and more mortgage securities helped financial institutions such as American International Group and Bank of America, giving the Dow Jones Industrial Average a more than 90 point gain.
Shortly after 2:15 p.m. EDT, the Federal Reserve said it will buy up to $300 billion in longer-term Treasurys and raise the size of lending programs already aimed at reducing mortgage rates by another $750 billion. The commitment to buy Treasury securities and additional mortgage-related debt should mean lower rates for a variety of business and consumer loans.
By buying Treasurys, the Federal Reserve is increasing the amount of money in the system in a similar fashion to cutting interest rates. That likely means another decrease in mortgage rates and more favorable rate spreads for banks. Banks will now be able to borrow money more cheaply, leaving more room for a profit. Also, the value of "toxic" mortgage securities will likely benefit from the Fed's purchases in that market.
"It's basically the next best thing" to a rate cut, said Dan Cook, senior market analyst at IG Markets. "Bernanke, in 2002, laid out this exact scenario almost word for word," he added, referring to a speech in which current Fed Chairman Ben Bernanke advocated use of the "printing press" to fight deflation.
Longer term, Cook said, "this debt is [going to be] tough to service after a while. I didn't hear about an exit plan."
Citigroup, the leading gainer on the Dow, added 57 cents, or 23%, to 3.08, and has now more than tripled in value since its low in early March. Still, Citi is off nearly 90% from this time last year. And, traders say, some of its recent gains were the result of an arbitrage strategy involving new preferred shares and existing common shares backfiring.
Among other banks, Bank of America added 1.40, or 22%, to 7.67, its highest level since January. Wells Fargo added 2.56, or 17%, to 17.22.
Hudson City Bancorp (Nasdaq) added 1.23, or 11%, to 12.02 after the New Jersey bank said it would require no help from the government and dubbed analysts' estimates for the quarter "reasonable."
Life insurers, whose shares were pressured by fears about their portfolios of mortgage-linked securities and stocks, bounced. MetLife added 4.37, or 21%, to 25.56; Hartford Financial Services Group rose 1.73, or 24%, to 8.86.
Shares of government-controlled insurer AIG, which also has large exposure to mortgage securities, surged 42 cents, or 44%, to 1.38, and has more than tripled from its low.
Overall, the Dow rose 90.88 points, or 1.23%, to 7486.58, its highest close in a month. The S&P 500 added 16.23, or 2.09%, to 794.35, after ticking above the psychologically significant 800 level during the session for the first time since Feb. 17. The technology-oriented Nasdaq Composite rose 29.11, or 1.99%, to 1491.22, helped by a reported bid from Dow component International Business Machines to buy Nasdaq component Sun Microsystems.