Bailout Report

Hoping the third time is a charm, the Fed announced it’s latest assistance program to aid money market funds and add liquidity to short-term funding instruments.

JPMorgan Chase will run five special-purpose investment vehicles (”units”) to buy up to $600 billion of certificates of deposit, bank notes and commercial paper with remaining maturities of 90 days or less.  Funding for these units will be provided by the New York Fed and by commercial paper issued by the funds to the money-market funds selling their assets:

• Assets will be purchased from up to 10 separate bank and financial company issuers (may be expanded to include other money-market investors).
• Only purchase debt with the top short-term ratings of A-1, F1 and P-1 given by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service respectively.
• 90% of purchases funded with loans from New York Fed on an overnight basis at the discount rate.
• 10% of the purchases financed by selling asset-backed commercial paper (which will not be eligible for the Fed program that extends credit to banks to buy such assets).
• In place until April 30 unless extended by the Board of Governors
• Start date announced by end of the week.

Money-market mutual funds control $3.45 trillion in assets and have suffered $500 billion of out flows since August.   $341 billion of that was pulled from institutional funds that can invest in corporate debt, more than a quarter of the  assets in those funds.  The importance of these funds can not be understated.  US-based money-market mutual funds hold more than 63 percent of outstanding unsecured commercial paper and 39 percent of asset-backed commercial paper (at the beginning of September).  In the first two attempts to prevent money market funds from breaking the buck, i) the Fed agreed to give loans to banks so they can buy asset-backed commercial paper from money funds ($122.8 billion of such loans outstanding as of Oct 15) and ii) Treasury used a $50 billion emergency pool to offer money funds guarantees against losses.

In addition to the now three programs, the Fed will start an unlimited program to purchase commercial paper directly from issuers next week.