Fed auctions $28.77b in Treasurys to ease credit problems

By JEANNINE AVERSA AP Economics Writer

WASHINGTON (AP) - The Federal Reserve has auctioned $28.77 billion in safe Treasury securities to big investment firms, part of an ongoing effort to ease credit problems.

The auction - the seventh of its kind - was held Thursday and drew bids less than $50 billion being made available. The reduction could be viewed as a sign of some improvement in credit conditions.

In exchange for the 28-day loan of Treasury securities, bidding firms can put up more risky investments, including certain shunned mortgage-backed securities and bonds backed by federally guaranteed student loans, as collateral. Bidders' identities are not made public.

The program began March 27.

In Thursday's auction, investment firms paid an interest rate of 0.2500 percent for a slice of the securities.

The auction program is intended to make investment houses more inclined to lend to each other. The program also is aimed at providing relief to the distressed market for mortgage-linked securities and for student loans.

To help shore up the shaky student loan market, the Fed agreed last week to let financial institutions put up bonds backed by federally guaranteed student loans as collateral. Thursday's auction was the first where that option was available. Spreading credit problems have forced more than 60 lenders to stop making federally guaranteed student loans, either temporarily or permanently.

The lending program is one of several unconventional steps the Fed has taken to deal with the credit crisis.

Credit troubles worsened earlier this year, driving investment firm Bear Stearns to the brink of bankruptcy and spurring fears that other big Wall Street companies could be in jeopardy.

Wanting to avert a broader panic that could endanger the entire U.S. financial system, the Fed agreed last month to temporarily let investment firms obtain emergency loans directly from the central bank - a privilege previously limited to commercial banks. The decision marked the broadest extension of the Fed's lending authority since the 1930s.

(This version SUBS 2nd graf to CORRECT that auction is seventh, sted sixth, of its kind.) )