Did someone order another slug of anti-freeze? The US Federal Reserve, in its fight to defrost short-term debt markets, is spewing forth acronyms and vehicles as freely as the bankers that precipitated this crisis – and establishing itself as the market’s new middleman. On Tuesday, it added a money market investor funding facility (MMIFF) of up to $540bn to its asset-backed commercial paper money market mutual fund liquidity facility (AMLF) and its commercial paper funding facility (CPFF).
The latest in this obtusely named trio aims to repair another market fissure. The CPFF provides funding to America’s companies by buying up their commercial paper. Under the AMLF, the Fed snapped up asset-backed commercial paper from money market funds hit by redemptions. This time, money market funds (and perhaps a wider range of investors in due course) can sell certificates of deposit and commercial paper issued by financial institutions to special purpose vehicles, limited to buying paper from 10 names each.
With so much cash sitting on the markets’ sidelines, the authorities must step in. Investors have demanded some $500bn back from “prime” money market funds since August, preferring refuge in Treasury funds. The issuance required to finance the governments’ various programmes will start to make that move uneconomical – yields on three-month bills are this week back over 1 per cent at their highest since mid-September. For now, though, the MMIFF should help funds meet demand to shift assets. The New York-administered MMIFF – unlike the Boston-run AMLF – brings in the private sector, in form of JPMorgan, to manage the assets and demands that sellers take a 10 per cent first loss stake in the acquiring fund. That is despite in spite of the fact that the financial sector is now swaddled in government guarantees. The more complex the solutions, the more difficult – and potentially more expensive – they will be to unwind in the future. With the year’s end nearing, when demand for cash rises, the authorities’ first priority must be to keep the market thawing into winter.
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