Investment banks: borrowing from Fed

In a bid to stabilize the jittery markets, the Fed said on Sunday that it would allow investment banks to borrow from its discount window using a wide range of investment-grade securities for collateral. Markets were unstable after a run on the bank at Bear Stearns Cos Inc (BSC) forced the investment bank to sell itself to JPMorgan Chase & Co (JPM) at a fire-sale price.

The Fed has also cut the rate at which dealers borrow at the discount window to 2.5 percent from 3.5 percent, in two separate actions this week.

Goldman Sachs plans to test the program sometime this week, a spokesman said. Morgan Stanley Chief Financial Officer Colm Kelleher said his bank has already tested the program, and a spokeswoman for Lehman said the investment bank has also done so.

Erin Callan, CFO at Lehman Brothers Holdings Inc (LEH), said in a conference call on Tuesday that dealers can borrow from the discount window at attractive terms.

“We would expect that the dealer/brokerage community will actively begin to access the new program,” Callan said. The program is a statement of confidence to parties that trade with and finance Lehman Brothers, and will also allow Lehman to fund more business with clients, she added.

In August, when commercial paper markets were seizing up, the Fed cut the discount rate for commercial banks. Soon after that, the four largest U.S. banks and a major international bank borrowed more than $2 billion total at the discount window, to help remove the stigma of getting short-term financing from the central bank.

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