$500b Withdrawn From Money Market Funds Since August, Fed To Provide Funds Up to $540b In Aid

As the money market fund industry continues to get hammered by withdrawals—about $500b has been redeemed by customers since August—the Fed is stepping up to provide up to $540b in loans to money market managers:

The initiative is the third government effort to aid money- market funds, which in stable times are a key source of financing for banks and companies. The exodus of investors, sparked by losses from the aftermath of the Lehman Brothers Holdings Inc. bankruptcy, contributed to the freezing of credit that threatens to tip the economy into a prolonged recession.

…JPMorgan Chase & Co. will run five special units that will buy up to $600 billion of certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or less. The Fed will provide up to $540 billion, with the remaining $60 billion coming from commercial paper issued by the five units to the money-market funds selling their assets, central bank officials told reporters on a conference call.

The new program is called the Money Market Investor Funding Facility, and officials said it’s intended as a backstop for money-market mutual funds to use as needed to meet redemptions.

Last month, the Fed agreed to give emergency loans to banks so they can buy commercial paper from money-market funds. There was $122.8 billion of such loans outstanding as of Oct. 15. The Treasury separately used a $50 billion emergency pool to offer money funds guarantees against losses.

Money-market funds have been hurt by their inability to sell back at par the commercial paper they bought from banks and other issuers, Fed officials said.

Each of the five special units will buy assets from up to 10 separate bank and financial company issuers. The program may be expanded to include purchases from other money-market investors. The special-purpose vehicles will finance 10 percent of their purchases by selling asset-backed commercial paper. That paper won’t be eligible for the Fed program that extends credit to banks to buy such assets, a central-bank official said. The New York Fed will lend the remaining 90 percent to the facilities on an overnight basis at the discount rate, which stands at 1.75 percent.

…The Fed said the facility will be in place until April 30 unless extended by the Board of Governors. Fed officials said they will announce a start date by the end of the week.

In addition to the three programs to aid money funds, the Fed next week will start an unlimited program to purchase commercial paper directly from issuers, after companies had to pay more to borrow or were cut off from that market.