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Fed, Other Central Banks Discuss MBS Rescue Ideas - FT

Mar 21, 2008 Market Outlook

Fed, Other Central Banks Discuss MBS Rescue Ideas - FT

Last Update: 3/21/2008 6:55:37 PM

DOW JONES NEWSWIRES

Central banks on both sides of the Atlantic Ocean are actively engaged in
discussions about the feasibility of using public funds in mass purchases of
mortgage-backed securities as a possible solution to the credit crisis, the
Financial Times reported on its Web site Friday.

These talks were part of a broader exchange on possible future steps in battling
financial turmoil and are at an early stage, the FT added.

The Bank of England seemed the most eager to explore the idea, the newspaper
said, adding that the U.S. Federal Reserve was open in principle to the
possibility that MBS intervention might be justified in certain situations, but
only as a last resort. And the European Central Bank appeared to be least
enthusiastic.

The Fed doesn’t believe the point has yet been reached when such drastic action
is necessary and considers the talks it has had with its counterparts as
“blue-sky thinking” rather than the formulation of a definitive policy proposal,
according to the FT.

Still, Fed officials are monitoring the impact of its latest round of liquidity
moves and interest rate cuts. The Fed also believes the U.S. hasn’t yet exhausted
all the options short of wholesale public intervention and further intermediate
steps are available to them - including even more aggressive use of the its own
balance sheet to boost liquidity in the markets, the FT said.

Analysts say the U.S. government also has plenty of scope to boost support for
the markets indirectly through the Federal Housing Administration or Fannie Mae
(FNM) and Freddie Mac (FRE), according to the FT.

The U.K. lacks these institutions, which could be one reason why the Bank of
England was the most eager to try outright intervention, the newspaper said. The
U.K. government already has become heavily involved in buying mortgages with its
recent nationalization of Northern Rock.

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