The Fed is Now Buying Commercial Paper

[Racehorse]

http://biz.yahoo.com/ap/081007/financial_meltdown.html

AP
Fed to buy massive amounts of short-term debt
Tuesday October 7, 9:51 am ET
By Jeannine Aversa, AP Economics Writer
Fed in bold move to thaw credit markets says it will buy massive amounts of short-term debt

WASHINGTON (AP) -- The Federal Reserve announced Tuesday a radical plan to buy massive amounts of short-term debts in a dramatic effort to break through a credit clog that is imperiling the economy.

The Federal Reserve, invoking Depression-era power under "unusual and exigent circumstances," will buy "commercial paper," a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls.

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The $99.4 billion daily market for this crucial financing, which relies on investors rather than banks, has virtually dried up. Most investors have become too jittery to buy paper for longer than overnight or a couple days.

That has made it increasingly difficult and expensive for companies to raise money to fund their operations. Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.

The unstable situation has left many companies vulnerable. The notion under the plan is for the government to provide a "backstop" that would give companies a new place to get cash, the Fed said. The action makes the Fed a source of credit for nonfinancial businesses in addition to commercial banks and investment firms.

The Fed's action helped lift investors' spirits. The Dow Jones industrials rose 145 points in early trading, a day after a huge selloff put the Dow below 10,000 for the first time in four years.

The Fed said it is creating a new entity to buy three-month unsecured and asset-backed commercial paper directly from eligible companies.

"The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors" have become increasingly reluctant to buy commercial paper, especially longer-dated maturities. As the market for commercial paper shrank, the Fed said rates on the longer-term debt "increased significantly," making it more expensive for companies to borrow.

The Treasury Department, which worked with the Fed on the program, said the action is "necessary to prevent substantial disruptions to the financial markets and the economy."

The Treasury will provide money to the Federal Reserve Bank of New York to support the new program, the Fed said. It did not say how much.

If a company's commercial paper is not backed by assets or other forms of security acceptable to the Fed, the company could pay an upfront fee, the central bank said.

The Fed said it hoped its effort would jolt the commercial paper market back to life.

"This facility should encourage investors to once again engage in term lending in the commercial paper market," the Fed said. That should eventually spur financial companies to lend to each other and to their customers, including consumers, the Fed said.

The Fed said it planned to stop buying commercial paper on April 30, 2009, unless the Federal Reserve board agrees to extend the program.

There was $1.61 trillion in outstanding commercial paper, seasonally adjusted, on the market as of last Wednesday, according to the most recent data from the Fed. That was down from $1.70 trillion in the previous week. Since the summer of 2007, the market has shrunk from more than $2.2 trillion.

Pressure also is growing on the Fed to reverse course and order a deep reduction in its key interest rate, now at 2 percent. Such a move would be aimed at reviving the moribund economy by encouraging consumers and businesses to boost their spending. Many predict the Fed will act on or before its next meeting on Oct. 28-29. And, some believe it could be part of a broader coordinated move with central banks in other countries.

Fed Chairman Ben Bernanke may offer clues on the Fed's next move when he speaks Tuesday afternoon on the economic outlook and developments in financial markets.

President Bush also was set to talk about the government's $700 billion bailout effort, which lets the government buy rotten mortgages and other bad debts from banks and other financial institutions. By getting these bad debts off bank's balance sheets, they might be in a better position to raise capital and more willing to lend to each other and to customers.

The Fed pledged Monday to take "additional measures as necessary" to battle the worst credit crisis in decades.

Treasury Secretary Henry Paulson has tapped a former Goldman Sachs executive to be director of the government's bailout program. Neel Kashkari, who has worked with Paulson at the department since July 2006, was chosen Monday as the interim head of the government's unprecedented effort to unclog the credit markets.

Kashkari, who was a vice president in Goldman's San Francisco office before joining the department, is one of four former executives from the firm now working feverishly to resolve the financial crisis.

The lending lockup is a key reason why the U.S. economy is faltering. Unable to borrow money freely or forced to pay a high cost to borrow, employers are cutting jobs and reducing capital investments. Consumers have retrenched.

Woohoo!!! If we're lucky, within a year or so, the government will own everything! That will be so nice. Then I won't have to worry about my investments or keeping my job or feeding myself or paying rent or anything. The government will tell me what to do, so I won't even have to think anymore!

I understand that they're trying to prevent a worse economic collapse, but it's just ridiculous. I'm really starting to wonder if we've just given up on capitalism or any kind of market economy and have decided to become a socialist republic.

[Manedwolf]

Buying unsecured debt?

What is Paulson going to do next? Payday loans?

[Balog]

The Federal Reserve, invoking Depression-era power under "unusual and exigent circumstances," will buy "commercial paper,"

You know that's a bad sign.  

[Manedwolf]

Also, China is now going to allow shorting. When did the world flip?

[buzz_knox]

So the Treasury is going to offer to the rest of the market what it offers to federal agencies (i.e. being the lender of last resort)?  This should be interesting.

[MicroBalrog]

Me, to the world: But you laughed at guys like me when we criticized the Fed's authority? Now we get to laugh.

[Manedwolf]

Well, the market isn't impressed by this. Morning news was all like "Rally! Rally! We have ignit...uh...*fail*" ...and now the rocket is lying on the ground.

[AZRedhawk44]

How can they keep doing this when every possible indicator shows they are pissing off just about everyone?

Voters don't like it by a huge majority.  A crushing majority.
Wall Street sure doesn't seem to like it.  Hence the DJIA and other markets down painfully, and still sinking with news of each new idgit decision.

Sigh.  At least my net worth is nothing right now.  Once they get all the communism out of their systems, I'll have a nice fat wad of cash under my proverbial mattress to buy on the upswing.

[lee n. field]

If we're lucky, within a year or so, the government will own everything! That will be so nice.

Read yer Bible.  That's what the Isrealite Joseph did for Pharoah in Egypt.  That worked out so well for them.

[seeker_two]

Wish Paulson would buy up my old credit card debt.....not the gov't....just Paulson....   

[Headless Thompson Gunner]

Sounds like the lender of last resort is doing its job.  What's the problem here?

[buzz_knox]

Sounds like the lender of last resort is doing its job.  What's the problem here?

People don't understand what this really means and think that its part of the bailout scheme.  Which, of course, it's not.

Short term debt is what many companies use for operating cash in the ordinary course of business.  They get immediate use cash for operating activities, and a business expense deduction for the interest payments.  The problem is that investors are so freaked out that it's hard to find buyers.  So, the fed is stepping in to buy the debt, which will be repaid anywhere from 11 months and 29 days out, or tomorrow.  That lets the companies continue to operate (which is sort of required to have the economy function).

[MicroBalrog]

Sounds like the lender of last resort is doing its job.  What's the problem here?

You're making the assumption we agree the Fed (a government agency by the way) should have this role.

[Headless Thompson Gunner]

Sounds like the lender of last resort is doing its job.  What's the problem here?

People don't understand what this really means and think that its part of the bailout scheme.  Which, of course, it's not.

Short term debt is what many companies use for operating cash in the ordinary course of business.  They get immediate use cash for operating activities, and a business expense deduction for the interest payments.  The problem is that investors are so freaked out that it's hard to find buyers.  So, the fed is stepping in to buy the debt, which will be repaid anywhere from 11 months and 29 days out, or tomorrow.  That lets the companies continue to operate (which is sort of required to have the economy function).

Again, I fail to see the problem.  By buying commercial paper, they're essentially making loans and ensuring that the credit markets stay orderly and functional.  This is their job, and we need this right now.

Seems like a much better idea than the bailout plan that was just passed.

[Headless Thompson Gunner]

Sounds like the lender of last resort is doing its job.  What's the problem here?

You're making the assumption we agree the Fed (a government agency by the way) should have this role.

We do agree.  You just don't know it yet.

[Manedwolf]

Sounds like the lender of last resort is doing its job.  What's the problem here?

People don't understand what this really means and think that its part of the bailout scheme.  Which, of course, it's not.

Short term debt is what many companies use for operating cash in the ordinary course of business.  They get immediate use cash for operating activities, and a business expense deduction for the interest payments.  The problem is that investors are so freaked out that it's hard to find buyers.  So, the fed is stepping in to buy the debt, which will be repaid anywhere from 11 months and 29 days out, or tomorrow.  That lets the companies continue to operate (which is sort of required to have the economy function).

Again, I fail to see the problem.  By buying commercial paper, they're essentially making loans and ensuring that the credit markets stay orderly and functional.  This is their job, and we need this right now.

Seems like a much better idea than the bailout plan that was just passed.

And when will they stop doing this?

[Racehorse]

If we're lucky, within a year or so, the government will own everything! That will be so nice.

Read yer Bible.  That's what the Isrealite Joseph did for Pharoah in Egypt.  That worked out so well for them.

That was sarcasm if you couldn't tell.

[Racehorse]

Sounds like the lender of last resort is doing its job.  What's the problem here?

People don't understand what this really means and think that its part of the bailout scheme.  Which, of course, it's not.

Short term debt is what many companies use for operating cash in the ordinary course of business.  They get immediate use cash for operating activities, and a business expense deduction for the interest payments.  The problem is that investors are so freaked out that it's hard to find buyers.  So, the fed is stepping in to buy the debt, which will be repaid anywhere from 11 months and 29 days out, or tomorrow.  That lets the companies continue to operate (which is sort of required to have the economy function).

Again, I fail to see the problem.  By buying commercial paper, they're essentially making loans and ensuring that the credit markets stay orderly and functional.  This is their job, and we need this right now.

Seems like a much better idea than the bailout plan that was just passed.

And when will they stop doing this?

Honestly, I doubt it will ever stop. Things like this that start out as "emergency" measures seem to take on immortality very quickly.

[MicroBalrog]

Well, the market isn't impressed by this. Morning news was all like "Rally! Rally! We have ignit...uh...*fail*" ...and now the rocket is lying on the ground.

B-b-but the people who oppose low interest rates and easy loans are crazy tinfoil hatters! CRAZY I SAY!!!!

[nobody's_hero]

Good thing the Fed isn't really accountable to anyone. Otherwise, we the people might be able to do something about this.

Yep, the snakes are secure . . .

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the Eternal God, I will rout you out... If people only understood the rank injustice of the money and banking system, there would be a revolution by morning."

[buzz_knox]

And when will they stop doing this?

Depends on what you are talking about.  If you mean, when will they stop doing this for federal agencies, never.  It's how the system works, and how gov't keeps operating when markets go nuts or when doing it this way is cheaper for tax payers.  If you mean, when will they stop doing this for non-gov't entities, then as soon as they can.  They don't like doing them, even for federal agencies.  If you've got another source other than the feds, they want you to use it.

[Headless Thompson Gunner]

Well, the market isn't impressed by this. Morning news was all like "Rally! Rally! We have ignit...uh...*fail*" ...and now the rocket is lying on the ground.

B-b-but the people who oppose low interest rates and easy loans are crazy tinfoil hatters! CRAZY I SAY!!!!

That's not what we're saying and you know it.

[MicroBalrog]

Well, the market isn't impressed by this. Morning news was all like "Rally! Rally! We have ignit...uh...*fail*" ...and now the rocket is lying on the ground.

B-b-but the people who oppose low interest rates and easy loans are crazy tinfoil hatters! CRAZY I SAY!!!!

That's not what we're saying and you know it.

Have you not noticed the tinge of irony in my posts?

Besides, I need to rephrase myself: I do oppose easy loans per se - I have serious doubts regarding the very need for a central bank in its current form.

[Headless Thompson Gunner]

Well, the market isn't impressed by this. Morning news was all like "Rally! Rally! We have ignit...uh...*fail*" ...and now the rocket is lying on the ground.

B-b-but the people who oppose low interest rates and easy loans are crazy tinfoil hatters! CRAZY I SAY!!!!

That's not what we're saying and you know it.

Have you not noticed the tinge of irony in my posts?

Besides, I need to rephrase myself: I do oppose easy loans per se - I have serious doubts regarding the very need for a central bank in its current form.

You know enough about economics to know the hows and whys of an elastic money supply.  Credit availability is collapsing all around us and, as a result, the supply of money available to the economy is shrinking sharply.  Circumstances like these are exactly why we have a mechanism to expand the money supply.  By buying commercial paper, the Fed is trying to increase liquidity in the markets (or, rather, to undo the decrease of liquidity caused by collapsing credit).  It's exactly what we need right now.  It might be an unorthodox method, but it makes sense given the circumstances.

So, again, would someone please tell me what the problem with this is?

[richyoung]

Well, the market isn't impressed by this. Morning news was all like "Rally! Rally! We have ignit...uh...*fail*" ...and now the rocket is lying on the ground.

B-b-but the people who oppose low interest rates and easy loans are crazy tinfoil hatters! CRAZY I SAY!!!!

That's not what we're saying and you know it.

Have you not noticed the tinge of irony in my posts?

Besides, I need to rephrase myself: I do oppose easy loans per se - I have serious doubts regarding the very need for a central bank in its current form.

You know enough about economics to know the hows and whys of an elastic money supply.  Credit availability is collapsing all around us and, as a result, the supply of money available to the economy is shrinking sharply.  Circumstances like these are exactly why we have a mechanism to expand the money supply.  By buying commercial paper, the Fed is trying to increase liquidity in the markets (or, rather, to undo the decrease of liquidity caused by collapsing credit).  It's exactly what we need right now.  It might be an unorthodox method, but it makes sense given the circumstances.

So, again, would someone please tell me what the problem with this is?

I'll play - where in the Constitution is any branch of the Federal government authorized to do this?