THE BASIS POINT

Fed Buys $145b in Commerical Paper, Update on AIG Loans

To make good on an announcement earlier this month, the Fed has completed the first few days of https://thebasispoint.com/2008/10/07/fed-to-buy-up-commercial-paper-to-ease-credit-crunch-other-banklender-news-roundup/“>commercial paper purchases to the tune of $145b. The maximum amount of commercial paper that can be purchase under the program is $1.8 trillion:

The Federal Reserve bought commercial paper valued at $145.7 billion in the first days of the program aimed at backstopping the market, indicating the central bank is generating most of this week’s record gains in short-term corporate borrowing.

The central bank extended $144.8 billion of loans as of yesterday to a unit that paid $143.9 billion for the debt, the Fed’s weekly balance-sheet report said today. Separately, direct loans to commercial banks rose to a record $110.7 billion yesterday from $107.5 billion a week earlier. Cash borrowing by securities firms totaled $79.5 billion, down from $102.4 billion.

A separate Fed report earlier today showed U.S. commercial paper outstanding rose by a record $100.5 billion, or 6.9 percent, to a seasonally adjusted $1.55 trillion for the week ended Oct. 29. The market plunged 20 percent over the previous six weeks.

Today’s report also indicates that companies issued about $9 billion a day of commercial paper from Oct. 27-29, indicating a pickup in the broader market, Crandall said. That compares with last week’s daily average of $6.7 billion for paper maturing in 81 days or greater and $2.3 billion two weeks earlier.

American International Group Inc. drew down $83.5 billion of its $123 billion rescue credit line from the Fed, down from $90.3 billion last week. The insurer may need to borrow more if capital markets fail to improve, Chief Executive Officer Edward Liddy said Oct. 22. The Fed first provided an $85 billion loan Sept. 16, then authorized another $37.8 billion on Oct. 8.

AIG has tapped the commercial paper program for $20.9 billion, AIG spokesman Nicholas Ashooh said.

Central bankers are flooding financial institutions with temporary loans in an effort to overcome cash hoarding by banks. The loans have enlarged the Fed’s balance sheet to $1.97 trillion, compared with $1.8 trillion last week and $887 billion a year earlier. The weekly release now runs eight pages, up from four last year.

Two days ago, Fed policy makers cut the benchmark interest rate, the federal funds rate, by a half-point to 1 percent, matching a 50-year low. The discount rate was reduced to 1.25 percent, the lowest since 2002.

Average daily discount window borrowing was $111.9 billion during the week ended Oct. 29, up $6.19 billion from a week earlier. Average daily borrowing by securities firms fell $23.9 billion to $87.4 billion.

The Fed’s holdings of U.S. Treasury securities fell $43 million to a daily average of $476.5 billion. The central bank had about $791 billion of Treasuries at the start of the credit crisis in August 2007.

In addition to the new Commercial Paper Funding Facility, the Fed started a separate program in September to lend to banks to buy asset-backed commercial paper from money-market mutual funds. Loans under that program totaled $96 billion as of yesterday, down from $107.9 billion a week earlier.

A third Fed program involving commercial-paper purchases, the Money Market Investor Funding Facility, will be up and running within a few weeks. Under that program, the Fed will lend up to $540 billion to five special funds to buy certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or fewer.

For the CPFF, the Fed began providing a breakdown of holdings and loans. The $143.9 billion paid to buy the debt by the Fed’s private Delaware-incorporated company, Commercial Paper Funding Facility LLC, includes fees payable to the program’s manager, Pacific Investment Management Co.

An item for “other investments” includes securities purchased with cash fees from participating companies. The Fed isn’t disclosing those investments, which totaled $894 million as of yesterday.

Maiden Lane

That and the debt’s book value comprise the net portfolio holdings of Commercial Paper Funding Facility LLC, which joins the Fed’s balance sheet. Another Fed unit, Maiden Lane LLC, holds the $26.8 billion of assets the central bank took on in its rescue of Bear Stearns Cos.

American Express Co., the biggest U.S. credit-card company, used the Fed’s commercial paper facility for the first time yesterday, joining General Electric Co., which tapped the facility on its first day, and dozens of other companies that have issued tens of billions of dollars of debt to the Fed.

Units of GMAC LLC, Chrysler LLC and Ford Motor Co. have also registered to issue paper to the Fed.

The Fed also reported that the M2 money supply rose by $54.3 billion in the week ended Oct. 20. That left M2 growing at an annual rate of 6.1 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed figure, adds savings and private holdings in money market mutual funds.

During the latest reporting week, M1 fell by $1.3 billion. Over the past 52 weeks, M1 increased 4.5 percent.