Fed to Buy Commercial Paper

October 7, 2008

Well, it looks like the bailout plan was only the beginning Bernanke, Paulson and Co.'s bag of tricks. After another manic Monday on Wall Street that featured a gut-wrenching 800-point drop in intraday trading, the Federal Reserve announced a new program to help the commercial paper market.

Commercial paper is basically short-term credit, or loans that rarely last more than 90 days. These loans are essential to the normal activities of businesses, from buying raw materials to covering payrolls. The market for these short-term business loans has been freezing up as risk-averse lenders are afraid of borrowers going under before they can repay the debt. In the past month, the amount of money outstanding in commercial paper loans has fallen 11% to $1.6 trillion on Oct. 1 from $1.82 trillion on Sept. 10.

Under the program announced Tuesday morning, the Fed will purchase three-month commercial paper directly from companies–meaning essentially that the Fed is lending directly to businesses. The program is slated to expire in April 2009 and, of course, will have financial support from taxpayers.

The market responded favorably in early trading, and without a major disruption I expect this trend to continue. But things move quick in this volatile market, so stay tuned….