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Archive for the ‘commercial paper’ Category

Money market funds and the commercial paper markets were at the heart of the financial crisis. In the fall of 2008, money market funds experienced massive withdrawals after one fund (the Reserve Primary Fund) reduced the value of depositors’ accounts after getting caught as Lehman went under holding significant amounts of Lehman short-term debt (other money market funds also lost money but were bailed out by their institutional sponsors). In response to this drain on funds for investing in short-term commercial paper, the Federal Reserve stepped forward and insured all money market funds. (more…)

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This week the Federal Reserve announced the creation of the Commercial Paper Funding Facility.  The facility allows the Fed to purchase 3-month commercial paper directly from issuers.  Why is it doing this, and how much will this cost taxpayers?

Let me start with some background. The commercial paper (CP) market is an important source of quick funds for high-grade firms in the corporate and financial sectors.  If a company like GE needs to raise $100 million quickly, it could do so in the CP market.  GE is unlikely to issue long-term debt or stock to raise the $100 million—- such funding takes time to source.  While the CP market is used to raise money quickly, it is also used as an ongoing source of funds. As of June of this year, GE had $63 billion in commercial paper outstanding. This was one-third of GE’s short-term borrowings and over 10% of its total borrowings (more…)

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