But why is the economy a basket case a year after Bear Stearns takeover?
After unveiling one plan after another to fix the seized-up credit markets, the Federal Reserve can claim some success in reviving lending for key groups of borrowers.
It can't say the same of meeting its overriding goal -- restarting economic growth.
Loosening up the commercial-paper market has allowed big companies like General Electric Co. to sell bonds. Lending dollar-based funds to foreign central banks probably helped drive down the benchmark rate for many mortgages and commercial loans. And intervention in money-market mutual funds likely prevented a financial shock from turning into catastrophe.
"All the programs have been successful to some degree," said Joseph Abate, money market analyst at Barclays Capital.
Some of the Fed's earliest special liquidity programs, such as expanding swap lines to foreign banks, simply built on old programs.
But one year ago this week, when it guaranteed J.P. Morgan's takeover of Bear Stearns to stave off global financial chaos, the Fed embarked on a series of unprecedented interventions into private capital markets.
That marked the first and highly controversial step of lending money to broker-dealers from its discount window, putting them on similar footing with commercial banks. And over the next year, it repeatedly widened its role as a lender of last resort, accepting more illiquid securities as collateral for loans and buying corporate debt straight from companies.
'We need to support the primary banking system, but we also need to support the shadow-banking system, which has really gone silent.'
— Mary Miller, T. Rowe Price
"There was discussion a year ago about the risks of moral hazard," said Mary Miller, director of fixed income at T. Rowe Price. "I think we've crossed that bridge -- we're way on the other side of that."
When it comes to the overall economy, the Fed's record on taking an unprecedented -- and perhaps risky -- role in the private capital markets is more mixed.
Consumer debt continues to contract. Citigroup Inc. ) has sought more aid from the U.S. government, highlighting severe problems among the nation's banks, struggling with record bad loans. And the Blue Chip survey of economic forecasters is now predicting this recession could register as the longest and deepest since World War II.
While the Fed's alphabet soup of liquidity programs has tackled each individual seizure in the credit markets, they haven't been able to address the underlying problem -- loans and securities in default or deemed illiquid.
Solvency
These rotten eggs are discouraging banks from making new loans because they fear they will need the cash to cover future write-downs.
"The problem has become more fundamental than liquidity," said Michael Feroli, U.S. economist at J.P. Morgan Chase & Co. "It's moved on to more of a solvency, capital problem."
Since the mortgage crisis took hold in late 2007, the U.S. central bank under Chairman Ben Bernanke has unveiled more than 10 programs to fix broken parts of the credit market, in addition to loans to bail out AIG and engineer the March 2008 sale of Bear Stearns to J.P. Morgan. In the process, it has expanded its balance sheet by about $1 trillion and has promised to commit about twice that amount to keep these programs going.
Its October program to buy up commercial paper gets some of the loudest applause.
Ushered in after the September collapse of Lehman Bros. and bailout of AIG prompted institutional investors to dump corporate debt, the program offers to buy high-quality, three-month commercial paper from companies such as GE and American Express Co. Since it started, commercial paper rates have fallen -- meaning private investors are demanding less to hold this debt.
Rates for three-month, double-A rated financial companies have dropped to about 0.44% from 2.25% in mid-September.
By January, the volume of commercial paper in the market had also returned to mid-September levels.
"Most critical was the [Commercial Paper Funding Facility] because it kept major corporations and major banks from having funding difficulties that could have become systemic problems," said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co.
Lower rates
A program to lend dollar-denominated funds to foreign central banks, through what's known as swap lines, has helped depress Libor, the London Interbank Offered Rate.
The Fed first announced arrangements with its European counterparts December 2007 and expanded the program over the past year.
These swap lines have made more dollar funding available to overseas banks. In turn, they have been able to post lower Libor rates, economists say.
Libor on three-month, U.S. dollar loans has fallen to about 1.32% after spiking past 4.8% the week of Oct. 10.
One of the earliest programs -- the Term Auction Facility -- may have helped stabilize Libor in the first half of last year before the rate vaulted higher after Lehman collapsed.
And one of the Fed's programs to prevent a catastrophic run on money-market funds seems also to have done its job. On Sept. 19 it launched the AMLF -- shorthand for Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility.
Redemptions
At the time, the $3.5 trillion money-market sector was experiencing huge outflows after the net asset value of the oldest money-market fund, the Reserve's Primary Fund, fell below $1 a share. That episode known as "breaking the buck" sparked a wave of investor redemptions.
The Fed's program helped the largest money market funds avoid selling their asset-backed commercial paper at fire-sale prices in order to meet redemptions. That could have led to more funds to break the buck, sparking a fresh run on money market assets.
"The AMLF has been the single most successful government intervention to date in the financial crisis," said Peter Crane, editor and publisher of Money Fund Intelligence.
