Commercial Paper Funding Facility (CPFF)

Speaking of pulling another trick out of the bag, here is the Fed statement on the latest alphabet scramble (CPFF) form of lending:

"The Federal Reserve Board on Tuesday announced the creation of the Commercial
Paper Funding Facility (CPFF), a facility that will complement the Federal
Reserve’s existing credit facilities to help provide liquidity to term funding
markets. The CPFF will provide a liquidity backstop to U.S. issuers of
commercial paper through a special purpose vehicle (SPV) that will purchase
three-month unsecured and asset-backed commercial paper directly from eligible
issuers. 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."   
(continued below)

Markets give up 100+ gains, still unsure of what direction to take . . .


Commercial Paper Funding Facility (CPFF)
Federal Reserve, October 7, 2008

The commercial paper market has been under considerable strain in recent
weeks as money market mutual funds and other investors, themselves often facing
liquidity pressures, have become increasingly reluctant to purchase commercial
paper, especially at longer-dated maturities. As a result, the volume of
outstanding commercial paper has shrunk, interest rates on longer-term
commercial paper have increased significantly, and an increasingly high
percentage of outstanding paper must now be refinanced each day. A large share
of outstanding commercial paper is issued or sponsored by financial
intermediaries, and their difficulties placing commercial paper have made it
more difficult for those intermediaries to play their vital role in meeting the
credit needs of businesses and households.

By eliminating much of the risk that eligible issuers will not be able to
repay investors by rolling over their maturing commercial paper obligations,
this facility should encourage investors to once again engage in term lending in
the commercial paper market. Added investor demand should lower commercial paper
rates from their current elevated levels and foster issuance of longer-term
commercial paper. An improved commercial paper market will enhance the ability
of financial intermediaries to accommodate the credit needs of businesses and

Commercial Paper
Funding Facility (CPFF) Terms and Conditions (57 KB PDF)



Additional reading:
Fed to Purchase U.S. Commercial Paper to Ease Crunch
Craig Torres
Bloomberg, Oct. 7  2008

Fed Announces Plan to Buy Short-Term Debt
NYT, October 7, 2008

Fed Moves to Thaw Credit Markets

Steven Mufson and Neil Irwin
Washington Post October 7, 2008; 10:18 AM

Fed to Purchase Commercial Paper In New Facility Backed by Treasury
WSJ, OCTOBER 7, 2008, 9:45 A.M. ET

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