Fed Considers Plan to Buy Companies' Unsecured Debt

[femmedem]

Source: NYTimes

Under a proposal being discussed with the Treasury Department, the Fed could buy vast amounts of the unsecured short-term debt that companies rely on to finance their day-to-day activities, according to officials familiar with the discussions. If this were to happen, the central bank would come closer than ever to lending directly to businesses.

While the move would put more taxpayer dollars at risk, it underscores the growing sense of urgency felt by policy makers in a climate where lending has virtually dried up...

snip

...The Fed plan is intended to renew the flow of credit on which the economy depends. Under its plan, the central bank would buy unsecured commercial paper, essentially short-term i.o.u.’s issued by banks, businesses and municipalities.

The market for that kind of debt has all but shut down in the last week, with many major corporations unable to borrow for longer than a day at a time, as banks become more fearful of giving out cash. The volume of such debt totaled about $1.6 trillion as of Oct. 1, down 11 percent from three weeks earlier.

Read more: http://www.nytimes.com/2008/10/07/business/07markets.html?_r=1&hp&oref=slogin

[Indenturedebtor]

1. Can we just own the banks already FFS?

Why do the Paulson Failout plan and then this if the Failout was supposed to keep these credit markets flowing in the first place?

[magellan]

3. Krugman said on Rachel last night, it's going to come to that

...probably sooner rather than later.

[mbperrin]

2. Sooner or later, business is going to have to return to the model

of using their own cash flow to run their operations.

The whole idea of using borrowed money for temporary purposes is just stupid. First rule of debt: the payments cannot last longer than what's bought.

When the current crop of "You don't have to know anything about a business, you just have to know how to manage" stupidity is finally weeded out, we'll be so much better off.

Meanwhile, if we never kill the weeds, the food crop can't grow.

I'll never figure out how a coup was performed in less than a week, and now it's standard thinking that no business can be allowed to fail, and no consumer is entitled to any sort of relief, aid, or safety net.

[blueclown]

4. Fed to buy ‘commercial paper’ to ease credit crunch

Source: Telegram & Gazette

WASHINGTON— The Federal Reserve Board, invoking emergency powers, announced today it will create a special fund to backstop the U.S. commercial paper market in an effort to support the financing needs of corporations.

The move comes as the credit freeze spreads to the market for short-term debt that hundreds of companies use to finance payrolls and meet other cash needs.

The Fed said it will lend against a special purpose vehicle at the targeted federal funds rate. The unit will buy from eligible issuers three-month dollar-denominated commercial paper at a spread over the three-month overnight-indexed swap rate, according to a press release in Washington today.

The Fed said the paper purchased by the vehicle must be rated at least A1/P1/F1. Issuers will pay the unit an upfront fee based on the commercial paper initially sold to the vehicle. The vehicle will cease buying commercial paper on April 30, 2009, unless the Board of Governors agrees to extend it.

The Fed yesterday said it will double its cash auctions to banks to as much as $900 billion, and telegraphed today’s announcement by saying it was looking for other ways to alleviate liquidity strains.


Read more: http://www.telegram.com/article/20081007/FRONTPAGENEWS/810070297

[willing dwarf]

5. This on top of the 700 billion Paulson got from treasury last week

How did $900 billion get authorized, or if your head of Fed can you just go shopping with the country's money with impunity?

[blueclown]

6. The Fed is accountable to no one.

They will extend their balance sheet at will.

Hopefully this is not a surprise to anybody.

[WriteDown]

15. Hmm....

Why does the Fed Chairman have to appear before Congress. Is it just for coffee and donuts?

[blueclown]

16. Well, that was an exagerration.

:)

They are accountable to Congress, but they have remarkable leeway in their day to day operations. They can expand their balance sheet at will at this point.

[Double T]

7. More wall street and corporate welfare, unbelievable!

The dollar is on its way to having the buying power of 2 cents. Keep those presses rolling over at the mint.

[lynnertic]

8. Someone please explain 'commercial paper' to me.

There's no smilie for wandering around in circles...

[paparush]

10. Lending to businesses for use as working capital rather than long term investment.

More Here:
http://en.wikipedia.org/wiki/Commercial_paper

Oh, and the Public Radio show "This American Life" just devoted a whole show to this-
"Another Frightening Show About the Economy"
http://thisamericanlife.org/Radio_Episode.aspx?episode=365

Definitely worth a listen

[willing dwarf]

11. Short term bridge loans to businesses

so they can meet payroll or finance capital expenses without needing to dip into whatever cash reserves they might have. But over the last 20 years, more and more businesses are living off credit and can't buy anything without a loan (or line of credit) to get out in front of the expense.

Think of the farmer who needs a loan from the bank just to put seed in the ground, or buy fuel for his combine to harvest his grain -- he uses commercial paper for that, but now all the building contractors, retail businesses, delivery truck companies etc all are getting loans to stay afloat.

[ozymandius]

12. Banks will not lend money.

So the Fed is circumventing the banks to lend directly to businesses that need to service their rollover debt. I can't imagine banks are too happy about this since they only receive returns on debts outstanding, not on the issuance of new debt.

[willing dwarf]

19. So will the Fed be making money on these loans?

Maybe that's how they'll recoup losses?

Maybe they should have decided to just hold a big lottery instead.

[ozymandius]

20. Yes

The Fed will charge a nominal amount of interest on these loans. I doubt it's a good as the discount window. But still...

[sinkingfeeling]

9. Finally, they're beginning to focus on the real problem now! This should have been the first step

last week instead of wasting $700 billion on lending institutions. If this doesn't ease the 'crunch', the next step is 'nationalize' the industry.

[SahaleArm]

13. Wonderful - Fed is now buying unsecured debt?

What's next? Credit cards, payday loans, personal lines of credit? Keep borrowing America - maybe the tooth fairy will pay it all back.

[dipsydoodle]

14. It will be cut to size and re-issued as toilet paper.

Hardly likely to be of any alternative use.

[customerserviceguy]

17. Chances are

it's not even real paper, just some of that electronic funny-money that passes for assets these days. Kind of like the statement from your 401K, there's just cyberspace promises in there...

[SahaleArm]

18. Taxpayers on the hook when companies go under

Free money for everyone!

[bean fidhleir]

21. Not quite "everyone".

We're not going to see any...except when the new limos pass by us as we huddle in our cardboard boxes in the alley.