Fed pumps more money into financial markets

The Federal Reserve on Tuesday announced yet another measure to pump more liquidity into the jittery financial markets.

The program will lend up to $200 billion of Treasurys to primary dealers, a group of 20 big investment firms, for a 28-day term. The firms can put up as collateral mortgage-backed securities issued by Fannie Mae and Freddie Mac, which generally are seen as safe because of an implicit government guarantee.

But in an unusual move, AAA-rated mortgage securities issued by banks will also be accepted. Many investors have shied away from these mortgage-backed securities because they fear defaults in the underlying assets will erode the value.

Coordination The effort, which is being done in conjunction with other central banks in Canada and Europe, is designed to promote trading in these markets that have frozen up, experts said. The measure allows banks to temporarily get these illiquid securities off their books.

"They are providing liquidity to keep the deterioration of that market from bringing down the broader economy," said Ian Lyngen, interest rate strategist with RBS Greenwich Capital.

Also Tuesday, the Fed announced that 82 banks submitted $92.6 billion in bids in its $50 billion auction held the day before. The Fed last week said it was increasing the auction sizes.

Lending stays slow But despite the eagerness to accept the government's "liquidity" injections, banks aren't significantly increasing their lending, experts said. In fact, some banks seem to be pulling back even further - for example, Citigroup Inc.'s (C, Fortune 500) last week said that it will scale back its mortgage business.

"It's still not enough to get the banks to loosen their lending terms," said Walker Todd, a research fellow at the American Institute for Economic Research and former attorney and economist at the New York Fed, referring to the last week's measures.

Banks have already borrowed a total of $160 billion since the Fed started holding these auctions in December as a way to ease the credit crunch, which began last year when mortgage defaults and foreclosures began to skyrocket. Since then, the crisis has extended far beyond the residential home loans, roiling the markets for everything from municipal bonds to student loans to auto financing.