Federal Reserve Bails Out Lenders Again
August 23, 2007
A consortium of mortgage lenders from the US and Europe have received a loan of around $2 billion from the Federal Reserve, it was announced today.
The loan was granted to a number of banks and lending institutions from the US and from within Europe, as a means of reducing liquidity problems in the short term.
Amongst some of the lenders were high profile banks such as Bank of America, Deutsche Bank and Citigroup, all of which have been hit badly after the problems from the sub-prime sector.
The US sub-prime mortgage lending sector has been a source of woe for mortgage lenders and market investors across the world over the last few months.
After credit was too readily made available, rising interest rates pushed repayments out of reach for many in the sub-prime sector, leading to rising defaults and extreme cash flow problems.
As a result investors worldwide have feared the potential for a credit crisis, with banks too short of funds to lend money to consumer and business borrowers alike. Were a so-called “credit crunch” to materialise, analysts have predicted we could be in for a global recession, with many businesses unable to finance expansion.
The move to borrow from the Federal Reserve was considered highly unorthodox, particularly given the stigma attached to central bank borrowing within the finance market.
Of the banks involved, only German giant Deutsche Bank refused to disclose the size of its loan, with many of the other notable lenders accepting $500 million each.
While this may provide short term finance for lending, analysts are quick to point out that this is still far short of a long-term solution, and with the US sub-prime still causing problems for lenders, there is no telling when this global volatility will come to rest.
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