Last week the US stock and capital markets careened from relief to fear again from the week’s events. These, of course, were predicated by the Federal Reserve Bank’s plan, announced last Tuesday, to inject $200 billion into the financial markets ( by taking mortgage-backed securities as collateral; and Friday’s surprise news that the Fed, with the assistance of JPMorgan Chase & Co., would lend the struggling Bear Stearns the necessary funds to plug a cash shortfall.

Not that the Bear Stearns crisis has ended; the extend of the investment bank’s red ink is unclear and the episode has shaken to the core investors’ confidence in an already shaky financial system. Events that the markets will be following closely this coming week are, not surprisingly, JPMorgan’s negotiations to acquire the bank, and to a lesser extent, how deeply will Fed Chairman Ben Bernanke cut the target for short-term interest rates on Tuesday. It is widely expected that the cut will be significant – by at least three-quarters of a percentage point to 2.25%.

The magnitude of credit crisis has spread beyond even the wildest scenarios imagined last August when it began. The Federal Reserve, though, is heartening observers by pushing the envelope on the tools and policies that are available to it.

Consider the monetary authority’s plans to take MBS as collateral. This plan had been preceded by a new Term Auction Facility in which depository institutions submitting winning bids were granted a 28-day collateralized credit facility at the Discount Window, Ernest Patrikis, a partner in the New York City office of Pillsbury Winthrop Shaw Pittman LLP and a former director of the Federal Reserve Bank of New York, noted in a recent client alert.

The Fed also announced temporary reciprocal currency arrangements — i.e. swap lines – with the European Central Bank and the Swiss National Bank. On March 7, the Fed increased that facility to $50 billion from $30 billion and announced that the System Open Market Account would enter into $100 billion in 28-term repurchase agreements.

It then took these measures a step further with last week’s announcement, he tells “The Federal Open Market’s Committee current action will help the financial markets on several fronts,” Patrikis explains. “It will provide the Fed’s primary dealers with the ability to raise term funds in the open market. The Fed’s taking of mortgage backed paper should also provide some financial support for that paper but more significantly, if the Fed’s willing to take that paper, so should institutional investors.”

The plan hinges on the fact that the Fed will be lending the most liquid form of security to primary dealers, he noted in his alert. “The primary dealers will be able to raise term funds in the open market by entering into repurchase agreement transactions using these borrowed securities.”

Clifton Rodgers, SVP of the Washington Real Estate Roundtable, tells that the action “is a good step in the right direction. It will bring liquidity to where it is needed the most and help financial institutions be more comfortable buying and bidding on securities.” spoke with Patrikis and Rodgers before plans to bail out Bear Stearns were made public and was unable to reach them after the news.

To be sure, there is no end of advice the market would like to see the Fed implement. The Roundtable, for example, is pushing a proposal for Congress to amend section 14 of the Federal Reserve Act, authorizing the agency to purchase loans and asset-backed securities, including CMBS. This would provide markets with a ‘mark’ and help stabilize credit markets, and it would not require the use of appropriated funds, the Roundtable noted in its letter to Congress. Such a move, Rodgers says, would help to re-establish a bid side to bring liquidity to the mortgage markets.

In contrast, Patrikis was not in favor of amending the Act. “Legislation is enduring – if something is enacted it stays on books forever.” If it is decided that the market needs an entity to purchase these securities, “let them develop some other vehicle to do it. Either a new agency or a special limited life agency to be funded through the appropriation process,” he says.

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