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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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From: Paul Kern10/7/2008 9:23:56 AM
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Fed to Purchase U.S. Commercial Paper to Ease Credit Crunch

By Craig Torres

Oct. 7 (Bloomberg) -- The Federal Reserve Board, invoking emergency powers, 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 purchase 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.

-- Editors: Chris Anstey, Alan Crawford.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net.
Last Updated: October 7, 2008 09:01 EDT
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