Fed braces markets for likely Lehman collapse

By Glenn Somerville

WASHINGTON (Reuters) - The U.S. Federal Reserve on Sunday launched a series of emergency measures to calm financial markets and ease any trading disruptions that could arise from a collapse of investment bank Lehman Brothers.

One of the biggest changes the Fed made was to accept equities as collateral for cash loans at one of its special credit facilities, the first time that the Fed has done so in its nearly 95-year history.

The Fed's actions and an agreement by 10 of the world's biggest banks to set up a $70-billion (38.8 billion pound) borrowing facility were intended to make sure market participants have ample access to cash while Lehman's affairs are wound down in markets over coming weeks or months.

Analysts said the Fed was increasingly making itself the lender of last resort for sorely stressed investment banks and seemed fearful the financial system was at risk of a meltdown as problems that originated in the U.S. subprime mortgage sector spread.

"There is little doubt that the Fed believes systemic risk is becoming closer to really landing on shore," said Tom Sowanick, chief investment officer for Clearbrook Financial LLC in Princeton, New Jersey.

The steps were the latest in a series of aggressive actions from the Fed dating to last August aimed at keeping markets liquid and trading at a time mounting defaults on U.S. mortgage debt were leading banks to recoil from providing credit.

In March, the central bank put up cash to facilitate JPMorgan Chase's takeover of Bear Stearns, concerned that letting the troubled investment bank collapse could trigger a system-wide crisis.

This time, however, the central bank -- in three days of crisis talks at the New York Federal Reserve Bank -- declined to put taxpayer funds on the line to prop up Lehman. Instead, it moved aggressively to ensure any unwinding of Lehman's affairs would be as orderly as possible.