Banks in record Fed borrowing

Banks in record Fed borrowing
Ongoing credit crunch sends commercial banks to Federal Reserve for $105 billion in daily borrowings.

NEW YORK (CNNMoney.com) -- Commercial banks borrowed a record of $105.8 billion a day, on average, from the Federal Reserve's emergency lending window over the past week, according to Fed data released Thursday.

Suffering from the ongoing credit crunch, banks turned to the Federal Reserve for funds, blowing through the previous borrowing record of $99.7 billion, set last week, the central bank reported.

Though the panic has eased somewhat in recent weeks, banks remain skittish about lending to one another and to businesses. The federal government is attempting to ease these concerns, though several of its programs have yet to come online. These include measures such as injecting capital into banks and providing insurance on all non-interest bearing accounts.

Once they do, banks will likely reduce their reliance on the Fed, said Kevin Giddis, head of fixed income trading at Morgan Keegan.

"We hope to see the banks starting to have some confidence in lending to one another and that will ease the borrowing from the window," Giddis said.

The Federal Deposit Insurance Corp. Thursday night approved an interim rule to cover all non-interest bearing accounts, which are mainly used by businesses. Some companies have feared for the health of their banks, prompting them to withdraw their deposits. This forces some of these institutions to turn to the Fed.

Investment banks, meanwhile, borrowed $111 billion a day, on average, down from $131 billion a week ago.

Troubled insurer American International Group drew down another $8 billion over the past week, bringing its total borrowing to $90.3 billion. This is nearly three-quarters of the $122.8 billion loan the federal government is providing AIG.

About $18 billion is being drawn from a $37.8 billion lending facility that the New York Fed provided to the world's largest insurer two weeks ago. The facility was designed to provide funding for AIG's businesses after its securities lending division ran into trouble.

The company has also borrowed $72 billion of the original bridge loan of $85 billion it received from the federal government in mid-September to prevent its collapse. AIG also separately announced Thursday that it was naming Paula Rosput Reynolds as vice chairman and chief restructuring officer and Richard Booth as vice chairman for transition planning and chief administrative officer. They will oversee the spinning off of AIG (AIG, Fortune 500) divisions, which will be used to pay back the bridge loan.

On Thursday, the Fed also reduced the value of the $30 billion portfolio of mortgage securities acquired to facilitate JPMorgan's March acquisition of Bear Stearns to $26.8 billion, down from $29.5 billion the week before.

The central bank revalues the portfolio every quarter. However, it plans to hold the securities for 10 years so the loss is largely just on paper.

Analysts at Bear Stearns had expected a $2 billion to $6 billion drop in the portfolio. Half the portfolio is made up of securities backed by commercial real estate loans. The other half is a mix of securities backed by prime residential mortgages, made to borrowers with good credit, and by Alt-A residential mortgages, given to those who provided little or no documentation of income and assets.

CNN