Fed may extend Wall Street lending

By Patrick Rucker

ARLINGTON, Virginia (Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday the U.S. central bank may keep an emergency lending facility for big Wall Street firms open longer than it initially intended, a signal the Fed is fearful of shutting down a vital backstop.

Credit costs have been driven higher and U.S. economic growth also has been hurt by market turmoil, Bernanke said at a forum sponsored by the Federal Deposit Insurance Corp.

"We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end, should the current unusual and exigent circumstances continue to prevail in dealer funding markets," Bernanke said.

Remarks by Bernanke and Treasury Secretary Henry Paulson, who spoke at the same conference, calmed financial markets, which had been rattled this week by the possibility that government-sponsored mortgage finance providers Fannie Mae and Freddie Mac would be forced to raise substantial new capital.

Wall Street stocks soared, prices of short-term U.S. Treasury debt securities eased and the dollar posted gains.

"The last thing he wants to do is walk away and see a dealer collapse," Anton Schutz, portfolio manager at Mendon Capital Advisors in Rochester, New York, said of Bernanke. "It's all about safety and soundness," he added.

Paulson contributed to market optimism by saying that flatter sales of existing homes in recent months implied some stabilizing in home-buying demand.

STILL UNDER STRAIN