Following actions by Europe over the weekend to support its banking system, the U.S. Treasury and Federal Reserve announced a series of additional support measures aimed at stabilizing the banking system and breaking a credit logjam in the money markets. The Treasury statement says, "Today we are taking decisive actions to protect the U.S. economy, to strengthen public confidence in our financial institutions, and to foster the robust functioning of our credit markets."
Actions include, "First, Treasury is announcing a voluntary capital purchase program ... selling preferred shares to the U.S. government on attractive terms that protect the taxpayer." Next, they've allowed the "FDIC to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts." And, third, "to further increase access to funding for businesses in all sectors of our economy, the Federal Reserve has announced further details of its Commercial Paper Funding Facility (CPFF) program."
The Fed's statement on the CPFF says, "The Federal Reserve Board on Tuesday announced additional details regarding the Commercial Paper Funding Facility (CPFF), including that it would begin funding purchases of commercial paper on October 27, 2008. The Board authorized the CPFF on October 7, 2008 under Section 13(3) of the Federal Reserve Act to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets and thereby increase the availability of credit for businesses and households."
It adds, "Under the CPFF, the Federal Reserve Bank of New York will finance the purchase of unsecured and asset-backed commercial paper from eligible issuers through its primary dealers. The CPFF will finance only highly rated, U.S. dollar-denominated, three-month commercial paper."
For more information, see: "Commercial Paper Funding Facility: Frequently Asked Questions" and "Commercial Paper Funding Facility: Program Terms and Conditions". Under the Q&A, the New York Fed says, "The purpose of the CPFF is to enhance the liquidity of the commercial paper market by increasing the availability of term commercial paper funding to issuers and by providing greater assurance to both issuers and investors that firms will be able to roll over their maturing commercial paper. These steps should contribute to an overall improvement of conditions in credit markets."
