Money Market Bailout - Federal Reserve launches crisis-era commercial paper funding facility

[Brian4Liberty]

Federal Reserve launches crisis-era commercial paper funding facility

The Federal Reserve acted to backstop a key source of short-term funding for big businesses on Tuesday, after calls by investors for the U.S. central bank to unclog the so-called commercial paper market.

The Fed opened up the commercial paper funding facility under section 13(3) of the Federal Reserve Act which enable it to support the real economy, rather than just the financial sector. The U.S. central bank received permission from Treasury Secretary Steven Mnuchin.

In a statement, the Fed said it was acting to provide credit “that will support families, businesses and jobs across the economy.” Technically, the Fed set up a special purpose vehicle that will purchase unsecured and asset-backed commercial paper directly from eligible companies, facilitating new issuance.

The vehicle would purchase three-month dollar-denominated commercial paper through the New York Fed’s primary dealers until March 17, 2021. The price offered will be based on 3-month overnight index swap rate plus 2 percentage points.

The Fed’s measures are expected to help restore liquidity in a funding market where creditworthy businesses raise cash to meet payrolls, inventory payments and other short-term liabilities.

Investors have called on the U.S. central bank to act to relieve pressures on the commercial paper market which surfaced since last week. This comes as even well-run businesses rushing to raise cash, with reports that companies like Boeing are now tapping their bank credit lines. Some money market funds that invest in commercial paper are also grappling with worries that they would face outflows.
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More: https://www.marketwatch.com/story/f...-commercial-paper-funding-facility-2020-03-17

Translation: They don’t want to say it, but they are preventing money market accounts from “busting the buck”. Money Market accounts attempt to maintain a $1 per share value at all times. The big caveat being that this is not guaranteed or insured in any way. Your bank or brokerage insurance (FDIC, SPIC, etc.) does not apply if your money market account falls below $1 per share. Most people don’t know this.

Your money market account purchases this type of commercial paper, which is supposed to be very safe and stable. When there are withdrawals, they need to sell this paper. Most of the time this market is very liquid. But if there are too many sellers and not enough buyers, the prices may drop too far or they may not be able to sell at all.

Thus the Federal Reserve will now purchase this paper, to prevent your money market account from busting the buck.

 

[Brian4Liberty]

From January 2016:

One of the reasons for the last panic that resulted in TARP was that a money market fund "busted the buck". In other words, your money market account can start losing money. IIRC, they changed the law to make it more acceptable for a money market account to bust the buck. Insurance on a mm account does not cover NAV falling below a dollar.

 

[Brian4Liberty]

From December 2012:

Don't use money markets. They may bust the buck, and you will have no recourse. Supposedly new rules have been silently put into place to allow money market funds to easily switch to a floating NAV (i.e. no longer a dollar).

I guess I’ll have to update that warning. While they can float the NAV of money market funds, they really want to avoid that. Thus the Federal Reserve actions today to prevent busting the buck.

 

[Brian4Liberty]

A little history from 2008:

Reserve Primary Fund Broke the Buck

The Lehman bankruptcy did produce immediate fallouts. On September 16, 2008, one day after the bankruptcy filing, a major money market fund, Reserve Primary Fund, with $62 billion under management, announced that the net asset value of its unit share has fallen below the required $1 level because of losses incurred on the fund’s holdings of Lehman commercial paper and medium term notes. Money market funds are supposed to be super safe. They can yield near zero returns but they are not supposed to lose principal.

The news of Reserve Primary Fund “breaking the buck” triggered widespread withdrawal from other money market funds, creating a system wide run on the money markets. This prompted the Treasury to announce a temporary program to guarantee investment in participating money market funds.

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

The Fed responded to the run of money market funds by again invoking Section 13(3) to establish the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) to extend non-recourse loan to US depository institutions and bank-holding companies to finance purchases of asset-backed commercial paper from money market mutual funds. A non-recourse loan is ultimately guaranteed only by the collateral pledged for the loan and not other assets of the borrower.
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Much more: http://www.henryckliu.com/page224.html

Oops, they did it again...

 

[H_H]

The thing to do is to buy actual Treasuries.

Safer than bank account, safer than money market.

If the day comes that the U.S. Treasury is defaulting on Treasury Notes? Then: Best Apocalypse Ever.

 

[Brian4Liberty]

Liquidity bump.