Federal Reserve Creates Commercial Paper Facility

donsutherland1 · 10-07-08, 09:32 AM

In response to a deepening credit crisis that saw a growing number of companies unable to issue commercial paper, the Federal Reserve announced the creation of a special facility that would purchase corporate commercial paper. The Federal Reserve announced:

The Federal Reserve Board on Tuesday announced the creation of the Commercial Paper Funding Facility (CPFF), a facility that will complement the Federal Reserve's existing credit facilities to help provide liquidity to term funding markets. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants. The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility.

More details can be found at: http://www.federalreserve.gov/newsev...20081007c1.pdf

The move is likely to give a boost to the stock market at the open of trading, as credit concerns have contributed to the stock market's recent sharp decline.

Onion Eater · 10-07-08, 09:12 PM

Mikey: “Mikey’ll eat it. He’ll eat anything!” (From a 1980’s breakfast cereal commercial.) “Do we have some stuff on the books that will be tough to get rid of? Yes. Am I worried about it? No. The Fed’ll buy it. They’ll buy anything!” proclaimed Richard Fuld, Lehman Brothers C.E.O., summer 2007. “The worst is behind us,” he added in April, after the Fed came through with their implicit guarantee to buy up all the worthless crap that nobody else wanted. See Fool’s Gold.

Fool's Gold: What the dollar is backed by – the assets of the Federal Reserve, composed mostly of AAA-Rated Securities, which are about as marketable as the chocolate-covered cotton balls that Milo Minderbinder was trying to foist on people in Catch 22. “The Fed’s balance sheet is getting corrupted with junk that others won’t buy or lend against,” observes Robert Robb.

AAA-Rated Securities: The new word for what used to be known as sub-prime mortgages or, more colloquially, as worthless crap. See Fool’s Gold.

Source: The Devil's Dictionary of Economics. Note: I posted this some time ago, before Lehman Brothers went under, but it is worth repeating.

From now on, whenever anyone refers to Ben Bernanke at Debate Politics, let's write it Ben "Mikey" Bernanke.