Fed to Add $140B in More Liquidity

The Federal Reserve on Friday morning moved to increase liquidity in an ever-tightening credit market, pledging to inject an additional $140 billion in short-term credit and to take on hard-to-sell asset-backed paper as collateral.

The Fed's term auction facility, created in December as a measure to provide direct lending to banks that have been reluctant to lend to each other in the credit crunch, will inject $50 billion into the banking system through auctions Monday and March 24. The two 28-day auctions were originally planned to be $30 billion, up from the original $20 billion offered in December.

The Fed also said it would initiate on Friday what is expected to be $100 million in 28-day term repurchase agreements in which it will accept as collateral any type of securities used in conventional open-market operations, including Treasuries and debt or mortgage-backed paper backed by government-sponsored mortgage buyers Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote).

Rapidly waning confidence in such agency-backed securities has led to a run of margin calls at lenders such as Thornburg Mortgage(TMA Quote) and Carlyle Capital, a fixed-income investment firm run by an affiliate of the private-equity firm Carlyle Group. Fears about the plummeting value of the paper and the viability of the companies that hold it hit stocks hard Thursday, sending the Dow Jones Industrial Average down more than 214 points.

The Fed said it would continue to increase the amount offered through both the repos and term auction facility "if conditions warrant."