Fed Makes Another Liquidity Move

Updated from 9:02 a.m. EDT

The Federal Reserve on Tuesday said it was prepared to pump another $200 billion in liquidity into credit-starved markets through a new facility that will lend Treasuries in exchange for mortgage-related paper that has been difficult to trade.

The new Term Securities Lending Facility will lend Treasury securities to primary dealers for 28 days in exchange for collateral including debt and residential-mortgage-backed securities from government-sponsored entities Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote) (MBS), as well as non-agency AAA/Aaa-rated private-label residential mortgage-backed securities.

Like the current securities lending program, the securities will be leant through weekly auctions. The first will be held March 27.

The move comes as the Fed is engaged in an uphill battle to inject liquidity in a market that has been engulfed by margin calls and banks reluctant to lend to each other.

Thornburg Mortgage(TMA Quote) last week said it was on the brink of collapse after receiving more than $600 million in margin calls from lenders, including JP Morgan (JPM Quote), uneasy about the firm's highly rated mortgage-backed securities. Carlyle Capital, a fixed-income investment manager that invests mainly in Fannie- and Freddie-backed mortgage securities, also has been besieged by margin calls.

Last week, the Fed increased the amount of short-term credit it is auctioning through its semimonthly Term Auction Facility. Beginning Monday, the Fed is now offering $50 billion in 28-day credit, up from $30 billion previously. The TAF, which the Fed introduced in December, is intended to spur lending between commercial banks.

The Fed also said last week that it would offer $100 billion through 28-day repurchase agreements, twice the normal length. Note: Other stocks to keep an eye on in light of this news include other players that have been hurt this year as a result from the mortgage crisis: Countrywide Financial (CFC Quote), Wells Fargo (WFC Quote), IndyMac (IMB Quote) and Bank of America (BAC Quote).