The next bold experiment (or desperate gambit, if you prefer) from the Fed appears to be a plan to start buying commercial paper directly from the companies that issue it. The reason is that the commercial paper market, a key source of short-term funding for big companies, is shrinking rapidly.
The Fed mentioned as sort of an aside to a press release issued first thing Monday morning that it was discussing such a step with Treasury.
Things have moved along a bit since then. Reports the Washington Post:
Last night, the Fed was drawing up plans to set up a special fund that would buy short-term commercial paper. The purchases would benefit banks as well as non-financial companies.
The fund would be financed by a loan from the Fed, and any losses would probably be covered by the Treasury using its new $700 billion bailout package. Fed and Treasury lawyers were hammering out details last night.
The commercial paper market is generally pretty low risk, so the likelihood of taxpayers losing a lot seems slim. Then again, the likelihood of a lot of the things that have happened over the past couple of weeks would have seemed awfully slim a month ago.
The bigger issue may be the Fed and Treasury, which have already become the most important actors in the banking industry, are about to expand beyond it to dole out credit directly to corporate America. As Floyd Norris, who was the first to get the significance of the proposal Monday morning, wrote:
[W]e may soon have the government deciding which companies deserve short-term loans, and at what interest rates. Does this remind anyone else of central planning systems?
Update: The plan is out, and it’s called the Commercial Paper Funding Facility (CPFF), which will use a special purpose vehicle (SPV) to “purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers.” The press release continues:
The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants. The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility.
Got that? Also, I have a related post here.
Update 2: Turns out Nouriel Roubini recommended this move last week.