Wall St in crisis as BoA buys Merrill; Fed to open taps

In more signs of a crisis on Wall St, Bank of America agreed late on Sunday to buy and rescue Merrill Lynch for US$44 billion and the US Federal Reserve announced it would open up its lender of last resort borrowing facility for investment banks to include lower rated bonds as possible collateral. The Wall St Journal reported that Merrill had agreed to the takeover at a price of $29 a share, two thirds down on where it was a year ago, because it feared what might happen in the coming days after the impending bankruptcy and liquidation of Lehman Bros. Meanwhile, the US Federal Reserve has just issued a statement saying it will widen the type of securities it will accept in its lending to banks and investment banks, effectively adding heavily to the cash available to traders and banks in the days ahead.  Here is the full statement below.

The Federal Reserve Board on Sunday announced several initiatives to provide additional support to financial markets, including enhancements to its existing liquidity facilities. "In close collaboration with the Treasury and the Securities and Exchange Commission, we have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses," said Federal Reserve Board Chairman Ben S. Bernanke. "The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets." "We have been and remain in close contact with other U.S. and international regulators, supervisory authorities, and central banks to monitor and share information on conditions in financial markets and firms around the world," Chairman Bernanke said. The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities. The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged. These changes represent a significant broadening in the collateral accepted under both programs and should enhance the effectiveness of these facilities in supporting the liquidity of primary dealers and financial markets more generally. Also, Schedule 2 TSLF auctions will be conducted each week; previously, Schedule 2 auctions had been conducted every two weeks. In addition, the amounts offered under Schedule 2 auctions will be increased to a total of US$150 billion, from a total of US$125 billion. Amounts offered in Schedule 1 auctions will remain at a total of US$50 billion. Thus, the total amount offered in the TSLF program will rise to US$200 billion from US$175 billion. The Board also adopted an interim final rule that provides a temporary exception to the limitations in section 23A of the Federal Reserve Act. It allows all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. This exception expires on January 30, 2009, unless extended by the Board, and is subject to various conditions to promote safety and soundness.