Super-SIV: It’s Alive
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.
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 households.
October 7th, 2008 at 9:58 am
I think you pegged it calling it the Super-SIV. As I commented in late 2007 as the Fed began this series of interventions in lending markets, it is easier to start these actions than to complete them. It is hard to estimate all of the consequences.
Just as I think George Bush, Jr., started to go wrong when he concluded that he had found his mission (fight terrorism, without boundaries), Ben Bernanke faces a similar problem (do whatever it takes to stop the Second Great Depression, without boundaries).
History is being made here, and it will be volatile…
October 7th, 2008 at 10:14 am
one thing we know for sure, is that the policy of “promoting” liquidity appears to have backfired, no reasonable person would claim that markets are functioning better now than when they started…in fact some people would say they are a lot worse.
as you say David, very hard to get out of this, I don’t expect to see a normal Fed balance sheet, i.e treasuries_t-bills in my lifetime.
I will pop in for a comment on your euro piece a bit later…busy………
October 7th, 2008 at 12:33 pm
Do you see any chance that this super-SIV will work and help to revive confidence on the unsecured term market ? This scheme would by-pass banks, issuers would get their papers to be bought by the FED…But does it really help banks in another way than helping them to deleverage further, and substitute CPs holdings with risk-free assets like T-Bills or idle cash with the Fed (now it is remunerated) ? Sounds to me more like directed lending, or “industrial policy” rather than sometrhing that may help from the systemic liquidity standpoint…what do you think ?
October 7th, 2008 at 12:53 pm
No, no chance.
This is the most bearish move ( so far…) since the start of the crisis, it won’t unfreeze money-markets because the fed and the treasury are promoting false markets by artificially compressing risk-premiums. Why on earth would you have confidence on the unsecured market when the fed is taking all the garbage as collateral and there is nothing left for unsecured creditors in case of failure.
More, it does not really help banks, more of a bailout for the money market industry.
This is worse than euro-dirigism, it’s soviet style gosplanism, where the people’s bank is picking and choosing who is good for free or near-free money. Disgusting…
Every thing the Fed has done has made matters worse including the CPFF, there are in panic mode, running around like headless chickens, hopeless bunch.
October 7th, 2008 at 1:20 pm
Wow.. Thats a confident statement JCK.
Thanks for sharing your thoughts. I Am gonna sip some whiskey and contemplate on the same.
October 7th, 2008 at 1:23 pm
This is being presented as a general facility. But is it a rescue of GE in particular?
October 7th, 2008 at 1:26 pm
GE is a factor, huge amount of GE paper on the market due to a large SIV liquidation (sigma)
October 7th, 2008 at 10:58 pm
It is noteworthy that the Federal Reserve will be purchasing directly from dealers as that constitues a bit of disintermidiation which must trouble those dealers with an established CP underwriting presence.
The deposit from the Treasury: Have you heard any dollar amount bandied about as I have not? And if this is separate(which I suppose that it is ) from the TARP,then will that necessitate additional borrowing beyond what is need to fund the TARP. If so,this becomes a little scary.
October 8th, 2008 at 2:46 am
john:
this is separate from the TARP, per the terms and conditions: “The CPFF will be structured as a credit facility to a special purpose vehicle (SPV) authorized under section 13(3) of the Federal Reserve Act.”
here is 13(3):
Discounts for Individuals, Partnerships, and CorporationsI
It is not clear what the Treasury deposit is for, I suspect it has to do with using a SPV rather than going direct to the paper issuer, i.e Treasury may be an equity investor in the SPV and acting as a front to loosen the requirements of 13(3) , this is looks dodgy to me, but I am not a lawyer.
Don’t know about the amount of the Treasury deposit, most likely small or for funding, the Fed doesn’t need Treasury to fund this it is just like a repo.
Add:
the reason I wrote that this thing looks a bit dodgy, is that the Fed press release clearly said that the SPV will purchase unsecured paper and 13(3) says it should be secured.