Wednesday October 22, 03:02 AM
Fed rolls out new 540-bln-dollar aid to financial sector
By Adam Plowright
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WASHINGTON (AFP) - The US Federal Reserve has reached deeper into the troubled financial system, offering up to 540 billion dollars of help to money market mutual funds in its latest response to the credit crunch.
Under a new program, the Fed offered the funds on Tuesday to back a private sector initiative to buy highly rated short-term debt instruments, including certificates of deposit and commercial paper, from money market investors.
The market for these instruments, which in normal times are considered safe investments offering modest returns, has frozen up in recent weeks due to a lack of investors willing to take the risk of buying them.
The new program "adds another tool to the Fed's arsenal as it attempts to unclog the credit markets," wrote analyst Ryan Sweet on Economy.com, a website run by the Moody's rating agency.
"The new facility is needed as it broadens the Fed's moves to improve the commercial paper market."
Disruption in the market for commercial paper threatens companies , which issue the securities to raise cash for short-term needs such as paying salaries.
The central bank called its initiative the Money Market Investor Funding Facility (MMIFF), which will provide financing to five private sector facilities to buy assets, each managed by bank JPMorgan Chase.
The purpose of a money market fund is to provide investors with a safe place to invest in short-term, low-risk assets that earn a steady return and can be easily sold to raise cash.
Amid the recent turmoil, a fund announced a loss to the widespread shock of investors. This was because clients were withdrawing their investments, forcing the funds to sell assets for which no liquid market existed.
The plan "should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments," the Fed said in a statement.
An analyst at brokerage Miller Tabak & Co., Tony Crescenzi, said the Fed's new facility "will reduce worries that have been high recently" about investing in certificates of deposit and commercial paper.
Commercial paper is short-term debt issued by companies to raise money for things such as inventory and salaries and is a vital component of corporate finance.
Certificates of deposit are a contract between a bank and depositor that obliges the depositor to keep money in an institution for a fixed amount of time in return for interest payments.
"On its own, the MMIFF won't solve things, yet it is another worthwhile add-on to the mass of initiatives that have been constructed in the effort to stabilize the financial system," said analyst Patrick O'Hare from Briefing.com.
On October 7, the Fed announced the creation of a Commercial Paper Funding Facility (CPFF) to buy commercial paper directly from borrowers to prevent more disruption to the financial sector and non-banking economy.
This facility is to begin buying on October 27.
"The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs," the Fed explained Tuesday.
"Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households."
-- Dow Jones Newswires contributed to this story --
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