Treasury and Fed Take Steps to Help Defrost Credit Markets
The Federal Reserve announced on Tuesday that it's creating a special facility to help the $1.7 trillion commercial paper market. The Commercial Paper Funding Facility will buy unsecured and asset-backed commercial paper directly from eligible issuers. The operation will be supported by the Treasury Department, which will make a "special deposit" at the Federal Reserve Bank of New York, according to a statement by the Fed.
"The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities." the statement said.
Among the financial instruments covered in the asset-backed paper category are credit card and auto loans.
Strained commercial paper markets have been cited as a major destabilizing force in financial markets.
The commercial paper market is particularly important to the economy because it is widely issued to fund day-to-day business operations.
Aiding the commercial paper market may test the limits of the Fed's authority because of the possibility of losses. The government appears to be working around that constraint by having the Treasury provide some buffer against losses.
In a related move Tuesday, the Fed announced details and dates for upcoming TAF auctions.
Meanwhile, the Federal Deposit Insurance Corp. is considering using the systemic risk exception more frequently. This would allow the agency to put direct cash injections into banks if it feels it is needed. This exception was used in Wachovia-Citigroup deal last week.
The moves coupled with Monday's announcement from the Fed that it will provide up to $900 billion in cash loans to banks facing trouble are all aimed at helping to unclog the credit markets.
Published on October 7, 2008
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