Today, 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." The Fed's release says, "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 Fed continues, "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."
Investment Company Institute President and CEO Paul Schott Stevens commented in response to the Federal Reserve's announcement of creation of the Money Market Investor Funding Facility, "We commend the Federal Reserve Board for the actions just announced, which will enhance the liquidity of the markets for commercial paper and other short-term financing. This initiative by the Federal Reserve will be of great benefit to all investors in this market, including money market mutual funds. More generally, it will help restore normal functioning to the credit market, an objective of highest importance to assist small and large businesses and financial institutions that depend on this market for financing."
Yesterday, Federal Reserve Chairman Ben S. Bernanke gave an "Economic outlook and financial markets" update before the U.S. House of Representatives Committee on the Budget. The testimony contained several mentions of money market mutual funds and a review of the comprehensive actions taken to date to thaw the temporary freeze in the credit markets, which began when the bankruptcy of Lehman Brothers caused Reserve Primary Fund to "break the buck".
Bernanke says, "The financial turmoil intensified in recent weeks, as investors' confidence in banks and other financial institutions eroded and risk aversion heightened. Conditions in the interbank lending market have worsened, with term funding essentially unavailable. Withdrawals from prime money market mutual funds, which are important suppliers of credit to the commercial paper market, severely disrupted that market; and short-term credit, when available, has become much more costly for virtually all firms."
He continues, "To address ongoing pressures in interbank funding markets, the Federal Reserve significantly increased the quantity of term funds it auctions to banks and accommodated heightened demands for funding from banks and primary dealers.... To address illiquidity and impaired functioning in the market for commercial paper, the Treasury implemented a temporary guarantee program for balances held in money market mutual funds, helping to stem the outflows from these funds. The Federal Reserve put in place a temporary lending facility that provides financing for banks to purchase high-quality asset-backed commercial paper from money market funds, thus providing some relief for money market funds that have needed to sell their holdings to meet redemptions. Moreover, we soon will be implementing a new Commercial Paper Funding Facility that will provide a backstop to commercial paper markets by purchasing highly rated commercial paper from issuers at a term of three months."
"Taken together, these measures should help rebuild confidence in the financial system, increase the liquidity of financial markets, and improve the ability of financial institutions to raise capital from private sources.... [T]he act also temporarily raised the limit on the deposit insurance coverage provided by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration from $100,000 to $250,000 per account, effective immediately.... [T]he FDIC was able to use its authority `to provide, for a specified period, unlimited insurance coverage of funds held in non-interest-bearing transactions accounts, such as payroll accounts <b:>`_. In addition, the FDIC announced that it would guarantee the senior unsecured debt of FDIC-insured depository institutions and their associated holding companies."
Finally, he says, "These measures were announced less than a week ago, and, although there have been some encouraging signs, it is too early to assess their full effects. However, I am confident that these initiatives, together with other actions by the Treasury, the Federal Reserve, and other regulators, will help restore trust in our financial system and allow the resumption of more-normal flows of credit to households and firms."
