Central banks aim to calm markets in financial storm

By John Parry, Marc Jones and Yoko Nishikawa

NEW YORK/FRANKFURT/TOKYO (Reuters) - Central banks mobilized worldwide on Monday to calm high tensions and ease deep distrust in short-term lending markets after Lehman Brothers Holdings LEH.N filed for bankruptcy protection and news that Merrill Lynch MER.N, another Wall Street giant long seen as too big to fail, was being sold.

As U.S. interbank lending rates jumped to triple the official target rate the U.S. central bank sets, the Federal Reserve pumped a total $70 billion (39.1 billion pounds) of temporary reserves into the banking sector in an effort to get short-term cash flowing again to some of the borrowers in dire need of funds.

At midday, New York Gov. David Paterson said he and other state officials had reached an agreement with American International Group (AIG.N), once the world's largest insurer by market value, to give AIG access to $20 billion of its own capital, preventing a liquidity crisis.

The Federal Reserve Bank of New York was hosting meetings about AIG's situation on Monday with representatives of the U.S. Treasury, financial services companies and state officials, a New York Fed spokesman said.

"We hope that we don't see a crisis which pushes the global economy to the brink of ruin," said German Economy Minister Michael Glos.

Central bankers had their work cut out. Stock prices sank and demand soared for extra short-term lending that they offered in an attempt to keep going the system that oils the wheels of modern capitalism.

OVERNIGHT BORROWING COSTS SOAR

On the interbank market, overnight dollar borrowing costs surged almost 1 percentage point to their highest in nearly three months, showing that banks are hoarding cash rather than lending it on.