Bernanke and the Fed have to be miffed over their lack of traction in addressing the credit bubble.

Of course if Bernanke understood simple economics as explained in Impossible To Get Something For Nothing, he would not be doing the silly things he is doing such as running out of letters in his alphabet soup of lending facilities.

Today we see yet another lending facility and fittingly enough it is called the MMIFF. Inquiring minds are reading the Fed’s Press Release On the MMIFF.

The Federal Reserve Board on Tuesday announced the creation of the Money Market Investor Funding Facility (MMIFF), which will support a private-sector initiative designed to provide liquidity to U.S. money market investors.

Under the MMIFF, authorized by the Board under Section 13(3) of the Federal Reserve Act, the Federal Reserve Bank of New York (FRBNY) will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. Eligible assets will include U.S. dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less. Eligible investors will include U.S. money market mutual funds and over time may include other U.S. money market investors.

The MMIFF complements the previously announced Commercial Paper Funding Facility (CPFF), which on October 27, 2008 will begin funding purchases of highly rated, U.S.-dollar denominated, three-month, unsecured and asset-backed commercial paper issued by U.S. issuers, as well as the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), announced on September 19, 2008, which extends loans to banking organizations to purchase asset backed commercial paper from money market mutual funds. The AMLF, CPFF, and MMIFF are all intended to improve liquidity in short-term debt markets and thereby increase the availability of credit.

Got That?

If not here are the Terms and Conditions of the MMIFF.

The MMIFF is intended to help restore liquidity to the money markets. The MMIFF will be a credit facility provided by the Federal Reserve to a series of special purpose vehicles established by the private sector (PSPVs) in accordance with the terms described below. Each PSPV will purchase eligible money market instruments from eligible investors using financing from the MMIFF and from the issuance of asset-backed commercial paper (ABCP). The MMIFF is authorized under section 13(3) of the Federal Reserve Act.

Eligible Assets of a PSPV

A PSPV will purchase from eligible investors at amortized cost U.S. dollar-denominated certificates of deposit, bank notes, and commercial paper with a remaining maturity of 90 days or less. Each PSPV will only purchase debt instruments issued by ten financial institutions designated in its operational documents. Each of these financial institutions will have a short-term debt rating of at least A-1/P-1/F1 from two or more major nationally recognized statistical rating organizations (NRSROs).

PSPV Concentration Limit

At the time of a PSPV’s purchase of a debt instrument issued by a financial institution, the debt instruments of that financial institution may not constitute more than 15 percent of the assets of the PSPV.

Liabilities of a PSPV

Each PSPV will finance its purchase of an eligible asset by selling ABCP and by borrowing under the MMIFF. The PSPV will issue to the seller of the eligible asset ABCP equal to 10 percent of the asset’s purchase price. The ABCP will have a maturity equal to the maturity of the asset and will be rated at least A-1/P-1/F1 by two or more major NRSROs. The Federal Reserve Bank of New York (FRBNY) will commit to lend to each PSPV 90 percent of the purchase price of each eligible asset until the maturity of the asset. The FRBNY loans will be on an overnight basis and at the primary credit rate. The loans will be senior to the ABCP, with recourse to the PSPV, and secured by all the assets of the PSPV.

Downgrade or Default of an Eligible Asset

If the debt instruments of a financial institution held by a PSPV are no longer eligible assets due to a short-term debt rating downgrade, the PSPV must cease all asset purchases until all of the PSPV’s assets issued by that financial institution have matured.

Upon a default of any asset held by a PSPV, the PSPV must cease all asset purchases and repayments on outstanding ABCP. Proceeds from maturation of the PSPV’s assets will be used to repay the FRBNY and, upon maturation of all assets in the PSPV, any remaining available cash will then be used to repay principal and interest on the ABCP. Any excess spread will be allocated as described below.

Head Spinning Yet?

If your head is not spinning, then please loosen the clamps on the vise your head is in. Once that is accomplished here is a translation of what is going on in English.

Fed to Provide Up to $540 Billion to Aid Money Funds

Bloomberg is reporting Fed to Provide Up to $540 Billion to Aid Money Funds.

The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions.

“Short-term debt markets have been under considerable strain in recent weeks” as it got tougher for funds to meet withdrawal requests, the Fed said today in a statement in Washington. A Fed official said that about $500 billion has flowed since August out of prime money-market funds, which with other money-market mutual funds control $3.45 trillion.

The initiative is the third government effort to aid the funds, which usually provide a key source of financing for banks and companies.

“The problem was much worse than we thought,” Jim Bianco, president of Chicago-based Bianco Research LLC, said in a Bloomberg Television interview. Policy makers are trying to prevent “Great Depression II” by stemming the financial industry’s contraction, he said.

JPMorgan Chase & Co. will run five special units that will buy up to $600 billion of certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or less. The Fed will provide up to $540 billion, with the remaining $60 billion coming from commercial paper issued by the five units to the money-market funds selling their assets, central bank officials told reporters on a conference call.

The new program is called the Money Market Investor Funding Facility, and officials said it’s intended as a backstop for money-market mutual funds to use as needed to meet redemptions.

Here is the deal in even simpler terms. In order to prevent the “Great Depression II”, the Fed and the Treasury have embarked on a series of measures similar in nature to those that caused the great depression.

The root cause of the great depression was the unsound lending patterns leading up to it. Those same unsound lending practices, now carried to the very limits of legality via Bernanke’s alphabet soup of facilities, cannot possibly be the cure.

In retrospect, the title of this post is inaccurate. It really should read Fed is Attempting to Cause “Great Depression II”.

Mike “Mish” Shedlock
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