What else is left for the Federal Reserve to buy or backstop? From BBG…
~~~~ ” Fed Sets Up New Program to Buy Money-Fund Assets (Update2)
By Craig Torres
Oct. 21 (Bloomberg) — The Federal Reserve will help finance purchases of up to $600 billion in assets from money- market mutual funds roiled by redemptions from investors seeking the safety of government debt.
“The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests,” the Fed said in a statement released in Washington today. About $500 billion has flowed out of prime money-market funds since August, a central bank official said.
JPMorgan Chase & Co. will run the five special units that will buy certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or less. The Fed will lend up to $540 billion to the five funds, an official told reporters on a conference call on condition of anonymity.
The new effort is called the Money Market Investor Funding Facility, the Fed said. Each unit will buy paper from up to 10 separate issuers….” ~~~~
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Fed offers $540bn to prop up money funds
By James Politi in Washington and Michael Mackenzie in New York
Published: October 21 2008 16:25 | Last updated: October 21 2008 20:57
The US Federal Reserve on Tuesday said it would finance up to $540bn (€410bn) in purchases of short-term debt from money market mutual funds to shore up a key pillar of the US financial system.
Money market funds have faced severe redemption pressures since the financial crisis deepened last month, forcing them to raise cash by scaling back their short-term lending to banks and selling their holdings of commercial paper.
This retreat has contributed both to a freeze in the interbank market and a steep decline in activity in the commercial paper market, which has made it difficult for banks and companies to raise short-term funds.
The Fed move highlights the extent to which policymakers are concerned about US money markets, even as conditions have improved, with interbank rates dropping. Policymakers are also worried that moves to prop up US banks may have undermined money funds, which compete with bank savings accounts.
“The short-term debt markets have been under considerable stress in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs,” the Fed said.
Lawrence Fink, chief executive of BlackRock, the asset management group, said: “This is a very big event. This is the first thawing that I really see in terms of helping the commercial paper market unravel itself.”
Under the scheme the US central bank will lend money to five special purpose vehicles, to be managed by JPMorgan Chase, tasked with purchasing assets from money market funds. These assets are low-risk paper, including certificates of deposit, bank notes and commercial paper with three-month maturities or less.
The creation of an extra liquidity facility on Tuesday was seen as complementing a move the Fed announced two weeks ago to create a vehicle aimed at purchasing potentially unlimited amounts of three-month debt from banks and non-financial companies. The size of the Fed’s balance sheet has nearly doubled.
Each of the five vehicles may purchase paper from 10 financial institutions. The overall size of the programme is capped at $600bn – with the Fed funding 90 per cent and the funds, which sell assets, taking the first 10 per cent of losses.
The Fed announced its plan as money markets thawed. Overnight dollar Libor declined 23 basis points to 1.28 per cent, below the Fed’s target rate of 1.5 per cent. Three-month dollar Libor eased to 3.83 per cent, its lowest fix in nearly a month. Three-month Libor was fixing about 2.80 per cent prior to upheavals and has yet to reflect the Fed’s rate cut of 50bp.
STATEMENT
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 short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs. By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments. Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households.
The attached term sheet describes the basic terms and operational details of the facility.
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.
MMIFF Terms and Conditions
http://www.ft.com/cms/s/0/4da5eebc-9f83-11dd-a3fa-000077b07658.html
FT Alphaville comments…
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So ironic that the financial beast that started this whole credit crunch becomes one part of the solution. The Fed stepping in means the govt guarantee another part of the financial system…what happens when the market doesn’t like the credit risk?! They better start getting to the bottom of what the real value is for assets, but I haven’t really heard anything that leads me to believe they will. Not sure about CP, but Isn’t Hank still living in a fairy land where Alt-A is priced at 65c (by the Grossian model)?!
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I saw an bloke on Bloomberg the other day, who said he’d only just become aware of Baltic Dry Index, and he was talking about commodities and the wider economy. I laughed.
The way I figure it, this is something akin to a desperation move. The Fed has already created a facility to by CP from companies, essentially unsecured lending since Money Markets don’t want it. Now the Fed is buying CP that MM are trying to sell? Hello!
Does nobody else think it a tad risky to be taking both sides of a trade? Especially if they’re having trouble shifting the paper at par…
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So the Fed is going to own CP. Wonderful. The gov’t owns banks, insurers so does it really matter it owns unsecured IOUs. They may be pondering opening pawn shops as well.
But this is not capitalism anymore. And there lies the biggest of all problems all bailouts do not address: getting rid of failed institutions (and their failed management). The morons who created this will now be backed by the government and voila, trust on the financial markets will be restored once and for all.
Unfortunately the Bald and the Beard can’t sell this ‘trust thing’ even to a first grader due to their own credibility issues.
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Every day a new programme.
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Baychev: The Fed has been purchasing CP for a month now. They’ve purchased over $150 billion of it. This is the third program they have introduced to do it. The drop dead dates on these programs are Jan. 30, and Apr 30th 2009.
I’m not sure where you have been living, but I think we have seen many institutions fall through the ice. Let’s count the companies with either failures or major management changes off the top of my head: Fannie, Freddie, Bear Stearns, Lehman Bros, WaMu, Countrywide, Wachovia, Merrill Lynch, Morgan Stanley, UBS, Northern Rock, AIG, IndyMac, The Reserve, Putnam…I know I’ve missed some.
Look, I hear what you are saying, but putting up sand bags against a storm that has already either wiped out or almost wiped out the companies listed above, to me, is a necessary evil.
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http://www.federalreserve.gov/releases/h41/Current/
just in case some of you don’t now what I am on about. Don’t look underneath and compare with the past. That is too scary. “nothing to see, move on!”.
For a year we talked about the moral hazard of bailouts. Then we tiptoed into the cold water, felt it and it felt good. So now we bailout everything. Yes, it is getting warm in the Fed press office announcing scheme by scheme but we are winning.
A few weeks ago, fed ran out of money. Treasury gave them a healthy vitamin injection. It was another toe in the water moment. Now we are just speeding along printing money. It’s not that bad now. It has a warm feeling to it, we can save the world.
What is next?
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this crisis is the result of too much forbearance of the little children in the financial services sector who have been bailed out again and again, with each crisis getting worse than the previous as the financial services sector realised it get away with daylight robbery and moral hazard is thrown out of the window.
none of this benefits the country as a whole.
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Spank,
governments are not making rational and capitalist decisions but ones that consolidate their power.
sloagm,
just to remind you:
Fannie, Freddie: forced to buy 40bn per month, no change in business practices.
Bear Stearns: the tob bras are now execs at JPM
Countrywide: assimilated by BofA
Wachovia: too early to say
Merrill Lynch: the crook Thain is exec at BofA
Morgan Stanley: no change
AIG: no change but the CEO
nothing has really changed, but it all depends on the perspective.
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