Bloomberg News reports that the Fed is increasing its so-called Term Auction Facility (TAF) by 50% to $75 billion. The reason? The program, which makes emergency loans to banks saddled with asset-backed securities (ABS) such as collateralized debt obligations (CDOs), is busted. That's because the TAF is designed to lower borrowing costs but it has accomplished the opposite.

This comes in response to criticism from a Stanford University economist, John Taylor, who wrote in a study last month that there is "no empirical evidence" the TAF has reduced the premium that banks charge each other to lend cash for three months. In fact, last month's TAF auctions were 2.82% and 2.87% -- above the then-2.5% rate on direct loans through the Fed's discount window. This "seeming anomaly" of the higher rate may have resulted from banks' willingness to pay a premium to avoid the stigma of borrowing from the Fed's discount-window.

This means that despite all the happy talk on Wall Street, we are not out of the woods by any stretch of the imagination. As I pointed out here, investment banks and hedge funds borrow $32 for every dollar of capital. If they owned just those dodgy securities, a mere 6% drop in the $6.1 trillion market for CDOs would wipe out their $340 billion worth of capital.

The U.S. Federal Reserve Friday announced an increase in the amounts auctioned to eligible depository institutions under its biweekly Term Auction Facility (TAF) from $50 billion to $75 billion, starting with the auction on May 5.

The action brings the amounts outstanding under the TAF to $150 billion, the Fed said.

In addition, the Fed also authorized further increases in its existing temporary reciprocal currency arrangements with the European Central Bank and the Swiss National Bank. The arrangements will now provide dollars in amounts of up to $50 billion and $12 billion to the ECB and the SNB, respectively, representing increases of $20 billion and $6 billion. The Federal Open Market Committee (FOMC) extended the term of these reciprocal currency arrangements through January 30, 2009.

Furthermore, the Fed also authorized an expansion of the collateral that can be pledged in the Federal Reserve's Schedule 2 Term Securities Lending Facility (TSLF) auctions. Primary dealers can now pledge AAA/Aaa-rated asset-backed securities, in addition to already eligible residential- and commercial mortgage backed securities and agency collateralized mortgage obligations, beginning with the TSLF auction on May 7, 2008.

The U.S. Federal Reserve will conduct two auctions of 28-day credit through its Term Auction Facility in March, the Fed announced Friday, in a statement.

The Fed said it will offer $30 billion in an auction on March 10, 2008 and $30 billion in an auction two weeks later, on March 24, 2008.

The Fed also reiterated its support for the term auction facility policy. The Fed said: "The Federal Reserve intends to conduct biweekly TAF auctions for as long as necessary to address elevated pressures in short-term funding markets. Decisions regarding auctions in April will be announced by Friday, March 28."