Fed, in emergency move, will lend to companies

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(Agencies)
Updated: 2008-10-08 10:15

Worries are mounting that a global recession is developing, and pressure is growing on the US government to do something beyond the $700 billion financial bailout package that Bush signed into law Friday.

To that end, the Fed announced it would begin buying companies' short-term debt. Power to do that was bestowed during the Great Depression of the 1930s as part of the Federal Reserve Act.

The government's bailout package is aimed at thawing lending by buying bad debts associated with mortgages from the books of troubled financial institutions. The idea is that the banks would then be in a better position to lend and get the economy moving.

Commercial paper borrowing usually ranges from overnight to less than a week. In the current climate of mistrust, however, the market has dried up considerably.

The action makes the Fed a crucial source of credit for nonfinancial businesses along with commercial banks and investment firms. It also exposes the Fed to risk because so much of the debt would not be backed by collateral.

Credit markets, clenched up for weeks now, relaxed somewhat after the Fed's move.

The Fed said it was creating a new entity to buy two types of short-term debt, known as three-month unsecured and asset-backed commercial paper, directly from eligible companies. It hopes to have the program up and running soon, Fed officials said.

Fed officials said they would buy as much of the debt as necessary to get the market functioning again but refused to say how much that might be. They noted that around $1.3 trillion worth of commercial paper would qualify.

The Treasury Department, which worked with the Fed on the program, said the action was "necessary to prevent substantial disruptions to the financial markets and the economy."

The Treasury will provide money to the Federal Reserve Bank of New York to support the new program, the Fed said. The money would be separate from the $700 billion financial bailout package.

The Fed said it planned to stop buying the short-term debt on April 30 but may extend the program.

There was $1.6 trillion in outstanding commercial paper, seasonally adjusted, on the market as of last week, the most recent data from the Fed. The market has shrunk from $2.2 trillion last summer.

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