Boldly going where no Fed has gone before, the Fed has announced the creation of the Commercial Paper Funding Facility (CPFF).
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.
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. As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day. A large share of outstanding commercial paper is issued or sponsored by financial intermediaries, and their difficulties placing commercial paper have made it more difficult for those intermediaries to play their vital role in meeting the credit needs of businesses and households.
By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market. Added investor demand should lower commercial paper rates from their current elevated levels and foster issuance of longer-term commercial paper. An improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households.
Academic Wonderland Expands Again
Already, there is a need to expand the final paragraph in my article earlier this morning called Pushing on a String In Academic Wonderland. Here is the revised text.
The credit markets are choking on credit, yet Bernanke is attempting to force more credit down everyone’s throats. Logic dictates the solution cannot be the same as the problem.
Trapped in academic wonderland, such simple logic is far too complex for Bernanke to understand. Sadly, we are all forced to watch Bernanke flop about like a fish out of water attempting to solve a solvency problem with liquidity schemes like the TAF, PDCF, TSLF, TARP, ABCPMMMFLF, and now the CPFF.
Bernanke is pushing on a string. None of these measures can accomplish much other than to delay the inevitable and slow the recovery. I suppose it is possible Bernanke understands this (although I doubt it) and is simply scrambling for time, hoping to prevent a global crash now.
If Bernanke’s mission is to buy time, the very best he can hope for is a long prolonged “L” shaped recession similar to what Japan went through in the so called “lost decade”. Regardless of what the mission is, the Fed is not in control of the global meltdown, and the continued launching of new facilities, none of which has worked, proves it.
Mike “Mish” Shedlock
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