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Geithner backs Fed liquidity actions, calls for more

Says moves to deflate pockets of risk, as some critics want, are likely to fail

By Laura Mandaro, MarketWatch

Last Update: 6/9/2008 1:10:00 PM

SAN FRANCISCO (MarketWatch) — The Federal Reserve should have more options to
relieve a liquidity squeeze, the head of the New York Fed said Monday, offering
support for the central bank’s recently criticized moves to shore up the
financial system.

The Fed system should have “greater flexibility to respond to acute liquidity
pressure in markets without undermining its capacity to manage the federal funds
rates,” said New York Fed President Timothy Geithner in a speech prepared for the
Economic Club of New York.

Geithner, who played an instrumental role in the fire sale of Bear Stearns to
J.P. Morgan Chase & Co. (JPM), urged major central banks to put in place a
standing network of currency swaps, collateral policies and account arrangements
“that would make it easier to mobilize liquidity across borders quickly in
crisis.”

Some of those elements have worked relatively well in the present crisis.

“We should leave them in place, refine them further and test them frequently,” he
added.

Since the start of the credit crunch last summer, the Federal Reserve has
arranged a number of programs designed to increase liquidity in pockets of the
debt markets, including those for commercial mortgage-backed securities and
interbank loans. The Fed also agreed to lend J.P. Morgan $29 billion to back its
acquisition of Bear Stearns, which regulators feared could trigger a system-wide
bank collapse.

These special programs have become an early hallmark of Ben Bernanke’s role as
Fed chairman. He’s tried to steer the economy as financial institutions and
consumer balance sheets undergo a massive deleveraging, with interest-rate cuts
only helping somewhat.

The U.S. economy is still struggling with a hangover from the housing-market
boom, more news from the financial sector showed Monday.

Lehman Brothers Holdings Inc. (LEH) said Monday that it will report a quarterly
loss of nearly $3 billion, its first since going public, after suffering serious
losses in its commercial-mortgage portfolio. It plans to raise $6 billion in
capital to shore up its financial standing.

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