New: Commercial Paper Funding Facility

[socca]

Fed Moves to Thaw Credit Markets - washingtonpost.com

The Federal Reserve said today it is establishing a special fund to lend money directly to businesses so they have adequate cash to operate, a major move by the central bank to ensure that "main street" companies are not crippled by the financial crisis gripping Wall Street and other money centers around the world.

Under the new program the Fed will buy up commercial paper, the short term debt that large companies around the country use to fund their day-to-day operations. That puts the Fed in the unprecedented position of, in effect, funding individual companies by buying their debt.

The "Commercial Paper Funding Facility" will be a special entity, funded by both the Fed and the Treasury Department, that will purchase three-month notes issued by corporations. It will include debt backed by specific assets, but also will make unsecured loans. Entities that sell unsecured debt to the new entity will have to pay a fee to account for the higher risk.

Amazing. So...the gov't is still practicing 'trickle-down', but now the trickle is starting a heckuva lot closer to the average Joe on the street. Why do I get the feeling that the gov't is just taking a huge cannon and firing it wildly at every perceived enemy that emerges from the mist?

Something about this plan doesn't seem quite right. The gov't is forcing me to loan money to Corporation X - an entity that is NOT operating in the public interest but in a very narrow, selfish, private interest. The boundaries between public and private interest are becoming increasingly blurred.

 

[Running_Man]

The Fed is actually prohibited from purchasing any unsecured securities, so they are evading the law "because of the extraordinary circumstances" to purchase unsecured commercial paper, which of course opens it up to the possibilities and political temptations of pick and choose what business could fail or succeed.

People are so afraid the system cannot recover from a shock, they will forfeit all freedom in order to be protected from financial pain.

 

[ziggy29]

People are so afraid the system cannot recover from a shock, they will forfeit all freedom in order to be protected from financial pain.

I could be wrong, but I suspect you are either quite young (and would thus benefit from a stock meltdown) or you expect to have a pretty generous pension and not heavily relying on your own investments. Those of us who are a bit older and have little more than their personal retirement savings to rely on may not be so cavalier.

 

[audreyh1]

Finally!!! Something like this is exactly what I have been hoping for. I'm starting to feel much better about us finding our way out of the current mess. Much needed direct short-term credit relief to main street businesses, since the banks are too scared to lend to each other or anyone else.

Something about this plan doesn't seem quite right. The gov't is forcing me to loan money to Corporation X - an entity that is NOT operating in the public interest but in a very narrow, selfish, private interest. The boundaries between public and private interest are becoming increasingly blurred.

Personally, I would much rather the Fed provide credit relief directly to main street businesses than to the financial institutions that got themselves into this mess. The financial sector is no more entitled to relief than main street IMO, in many ways less so. I'm not sure your gripe here - the $700 billion relief package was loaning money to "narrow private interest" corporations - in fact the culprits in this mess.

There are a lot of bad players that made this mess. But main street non-financial businesses (and their employees) are NOT one of them. Why should they be severely penalized by a completely frozen credit system that was none of their fault? Why should businesses cut way back on operations and lay off employees because credit has frozen and banks refuse to lend? Some rational relief was really needed here, to give the businesses a little slack so they can get through this short term crisis.

Audrey

 

[Running_Man]

I could be wrong, but I suspect you are either quite young (and would thus benefit from a stock meltdown) or you expect to have a pretty generous pension and not heavily relying on your own investments. Those of us who are a bit older and have little more than their personal retirement savings to rely on may not be so cavalier.

Then I take it your faith that Firecalc is correct when it said you could endure the worst of financial panics with 90% stock losses is not correct and would rather turn decisions over to former heads of Wall Street.

I would rather get the pain over with and start over than continue down the path of one National Bank with 3-5 trillion in loans outstanding in order to maintain a bubble financial system. The entire world is going to deleverage on the back of the Federal Reserve?

The idea that the world would end if the financial system was not bailed out in every corner of the world by the Federal Reserve must mean our system is not very good, and I don't count much on future politicians deciding how loans should be made and under what terms.

 

[socca]

I'm not sure your gripe here - the $700 billion relief package was loaning money to "narrow private interest" corporations - in fact the culprits in this mess.

I wasn't happy with Bailout #2, either.

It's not clear to me that discarding all of our long-standing principles regarding how our markets should work just so we can feel safe and comfortable today is a good idea. Pain prompts fundamental reform. Opiates let you pretend that you aren't sick until they wear off. Then, you need a stronger dose. Another death spiral - hooray!

Well, whatever. Anybody got a needle?

 

[audreyh1]

I don't know what kind of "long-standing principles" you are talking about. Centuries of experiencing the ravages of full unfettered capitalism went out of the window after the 1930s debacle. As a society we chose to put in Govt. controls to smooth things out. Overall worked pretty darn well until the last 10 years when many of those controls were lifted due to unbelievably poor judgement (and short term greed, of course). Now we're in a big mess - extraordinary times call for extraordinary measures. We've gotta rebuild everything all over again and figure out how to get back to sane controls. Time to just "let everything go" and let the worst happen? We already know what capitalism is like under those circumstances, and it's not pretty. Why should we destroy our economy to teach ourselves a lesson?

BTW - whatever "lessons" you think people might have learned prior to the 1930s - nobody learned anything! Crises kept repeating ad infinitum! Reasonable regulations have be put in place and enforced to protect our economy from that short-term profit motive that likes to ignore long term risk.

Ironically, I'm pretty sure we would not be in the current credit crisis if the Govt had decided NOT to "just let it go" and not let Lehman go bankrupt. Hard to say if there was a way to slow things down and get parts of it sold off, but maybe there was.

Audrey

 

[al_bundy]

Then I take it your faith that Firecalc is correct when it said you could endure the worst of financial panics with 90% stock losses is not correct and would rather turn decisions over to former heads of Wall Street.

I would rather get the pain over with and start over than continue down the path of one National Bank with 3-5 trillion in loans outstanding in order to maintain a bubble financial system. The entire world is going to deleverage on the back of the Federal Reserve?

The idea that the world would end if the financial system was not bailed out in every corner of the world by the Federal Reserve must mean our system is not very good, and I don't count much on future politicians deciding how loans should be made and under what terms.

world is not going to end, we'll just go back to the 1800's where half of every century is spent in a depression/recession

Fed is buying Asset Backed Paper so that GE and other large corporations don't have to fire tens of thousands of employees in the coming months. how evil of them

 

[Running_Man]

world is not going to end, we'll just go back to the 1800's where half of every century is spent in a depression/recession

Fed is buying Asset Backed Paper so that GE and other large corporations don't have to fire tens of thousands of employees in the coming months. how evil of them

The Fed is not buying asset backed paper -this is unsecured credit in most cases. That is why they are setting up a special entity because the FED is prohibited in their charter from doing this.

I thought all these problems were fixed last week?

 

[ziggy29]

I thought all these problems were fixed last week?

To the extent that it is supposed to work (which obviously remains to be seen), the bailout will take time to develop. Apparently the Fed believes the credit markets don't have that much time to wait. That's my assumption, anyway.

The bottom line is that *something* has to get the lines of credit flowing again to keep businesses moving and people employed, or else we're all screwed -- a Pyrrhic victory for the most devoted free marketeers.

 

[al_bundy]

so the right thing to do is let millions of people be laid off because corporations that are in good credit standing and have nothing to do with housing can't roll over their short term bonds

 

[ziggy29]

so the right thing to do is let millions of people be laid off because corporations that are in good credit standing and have nothing to do with housing can't roll over their short term bonds

That's putting a serious hurt on some state and local governments, too. Many rely on these short term lines of credit that are being squeezed now.

 

[al_bundy]

let them eat cake, or in today's equivelant just raise property taxes 50% or so and stop the short term borrowing

i know someone that works for one of Lehman's contractors. they had to lay off a lot of people and one of the people that was laid off had been with that company close to 20 years

 

[audreyh1]

FWIW - the Govt is only buying the top-rated commercial paper - the very creme de la creme. There is no direct picking or choosing involved (govt bias) here. If you are not a top-rated company - well, you're own your own.

What's truly amazing is that things are SO bad that you have no one stepping up to buy the short-term commercial paper of the most fiscally sound and best run companies in the US.

Audrey

 

[Running_Man]

How do they pick which they are going to buy? Or are they willing to buy the entire 1.2 trillion of top rated commercial paper? 50% of which is wall street type paper anyway.

They won't pick and choose like Bear Stearns - thumbs up Lehman thumbs down Goldman Sachss three thumbs up for them?

 

[al_bundy]

http://www.federalreserve.gov/newsevents/press/monetary/monetary20081007c1.pdf

 

[cardude]

FWIW, I'm a "main street" guy with a small business (car dealership), and we are hurting on several fronts: banks are scared to make even GOOD loans now because of the credit crunch, our flooplan rates shot up 1.5% (that's 1.5% X $2,000,000 in inventory, so it hurts) in one month due to LIBOR increases due to the credit crunch, and customers are scared sh**less and are buying NOTHING due to, um, overall panic and terrible press.

We need to get credit flowing quickly or lots of guys like me (and their employees) are in trouble. I wasn't responsible for any of the stuff that caused this mess and I am pretty conservative, so real people are out there getting hurt pretty bad. That's why you just can't say "let the market shake things out". It will take our economy forever to get back on track if we do that, imo.

 

[Running_Man]

I think Ben thinks he has a good chance of winning the pool! But getting past Berkshire Hathaways in the Semi-finals could be tough