INSTANT VIEW: Fed moves to backstop ailing CP market
NEW YORK (Reuters) - The Federal Reserve on Tuesday announced the creation of a special-purpose facility with the Treasury Department's blessing to begin buying commercial paper in yet another emergency move aimed at calming chaotic financial markets.
KEY POINTS: * The Fed said it was acting because money market mutual funds and other investors have become increasingly reluctant to buy commercial paper, which is widely issued to fund day-to-day business operations. * CPFF to provide backstop to U.S. issuers of commercial paper through "special purpose vehicle" * Vehicle will buy three-month unsecured and asset-backed CP directly from eligible issuers * Treasury to make special deposit at NY Fed to support facility
COMMENTS:
BOB PATTEN, SENIOR BANK ANALYST, MORGAN KEEGAN, NEW YORK:
"It's all about unfreezing credit markets. We've got to instill liquidity in the system. The commercial paper market is critical for financials and Fortune 500 companies. This is a critical step"
"The market is desperate to get some confidence back.
"There is no one thing that is going to fix the issues in the credit market. This is going to take a series of steps in an accelerated time frame to address.
"Credit needs to be put into the hands of the borrowers. Right now banks are hoarding liquidity en masse. Steps are being taken. All (these) steps are in the right direction.
"We're still in a recession, but if you get the credit markets open then we just focus on a slowing economy. That's manageable."
PETER SORRENTINO, PORTFOLIO MANAGER, HUNTINGTON ASSET ADVISORS, CINCINNATI, OHIO:
"The low risk thing is to let cash pile up, because right now cash is king. The Fed at this time has to use moral persuasion to say, 'Go out there and make loans.'"
"They have a huge bully pulpit and they can literally mandate, go out and make loans."
CARY LEAHEY, ECONOMIST, DECISION ECONOMICS, NEW YORK:
"Once again the Fed continues to pull all the levers it can think of and it's thought of a new one in the form of effectively accepting unsecured paper -- commercial paper -- from a wide variety of institutions. Up until today, the Fed did not make loans without some form of collateral. That has now gone out the window."
ROBERT MACINTOSH, CHIEF ECONOMIST, EATON VANCE CORP., BOSTON:
"Every little bit probably helps, but collectively people need to sit back and take a deep breath, and decide if all these different techniques and maneuvers are enough. I got to believe they will be ultimately, but I guess I don't understand why it takes so long... The rest of the G7, I'm putting more blame on them for not working more closely with the Fed.
"Ironically, the big headline when we first came in this morning was Australia cutting rates. That's fine, but they're not a major player in the world economy...
"I think they (Europe) need to do more. They're just starting to find these problems, but we know that they're there. We know there's a lot of dead wood on the balance sheets of financial institutions in Europe. We need to see them have a more coordinated approach. I applaud Australia, but we need to see a more coordinated moves across the globe."
DAVID WATT, SENIOR CURRENCY STRATEGIST, RBC CAPITAL MARKETS, TORONTO:
"You have got market which are basically frozen and no private buyer is buying it so they are doing what they should be doing, which is stepping in as market maker of last resort. We know that the commercial paper market has been under intense pressure, feeding through... mutual funds and adding risk to the money market overall. They are obviously doing everything they can to rebuild the confidence that has been shattered.
"To some extent it does help to restore that confidence and that will certainly help to boost the market and confidence, in that the Treasury and other central banks are getting ahead of the crisis rather than falling further behind.
"This at least is one of the key elements that might get us through the worst of the crisis... to the extent that was a systemic risk that was unresolved, it is now a systemic risk that has some resolution. It removes some of the systemic risks that are out there and it might help confidence to some extent. But can it do that on itself, no. There is still a lot of work ahead."
DIVYANG SHAH, CHIEF MARKET STRATEGIST, COMMONWEALTH BANK OF AUSTRALIA, LONDON:
"Unconventional measures are dominant and the debate over the Fed Funds rate does not matter given the moves we have seen on the effective Fed Funds rate. This move is confirmation that the focus for policy makers has also turned to limiting the impact of financial sector strains to the non-financial sector... This reduces the chances of an imminent and even coordinated move on interest rates with the focus remaining on unconventional measures. Once again another move by the Fed to take on board more credit risk... the market continues to shun risk and the Fed is the buyer of first resort for much of the risk."
BOB ANDRES, CHIEF INVESTMENT STRATEGIST, PORTFOLIO MANAGEMENT CONSULTANTS, PHILADELPHIA:
"This has to help. The commercial paper market is so important to the function of Corporate America. It affects everything. In essence, this is their operating money and how do they grow their company without credit? Breaking this vicious cycle is critical."
"The Fed is back to 'whack a mole' again because that's the problem of the day. They are behind the curve and they are scrambling. When you scramble, you don't instill confidence. The illness keeps getting away from them."
