The encyclopedia · Finance & Accounting · Financial decision · 2008–2010
The Fed backstopped commercial paper at penalty prices
After Lehman, the Fed bought three-month commercial paper at penalty rates, peaking near $350bn, and returned a $5.3bn profit.
Federal Reserve
the move
After Lehman Brothers failed in September 2008, money market funds fled prime commercial paper, and firms that funded themselves with three-month paper lost access to credit almost overnight.
On 7 October 2008 the Federal Reserve announced the Commercial Paper Funding Facility: a special purpose vehicle that would buy three-month unsecured and asset-backed commercial paper directly from eligible issuers.
The price was deliberately unappealing: 100 basis points over the overnight index swap rate for asset-backed paper and 300 basis points for unsecured paper. Issuers used it only when the market truly was closed, so it did not crowd out private lenders.
Usage peaked in the third week of January 2009 at roughly $350bn held in the vehicle. It then declined as markets healed; the facility expired on 1 February 2010, and its estimated $5.3bn net income was remitted to the Treasury.
why it works
- Penalty pricing keeps private lenders in the market while still providing a credible floor.
- Buying directly from issuers, rather than through dealers, reaches the firms that actually need funding.
- The facility self-liquidates: when market rates fall below the penalty, demand disappears.
what transfers
A backstop must punish, not pay. Penalty rates kept the CPFF for genuinely distressed issuers, restored a floor under the market, and still earned a profit for taxpayers.
what came after
The CPFF earned a profit for taxpayers and expired on schedule in February 2010; when the pandemic froze commercial paper in March 2020, the Federal Reserve relaunched the same design.
references
- Commercial Paper Funding Facility — Terms and Conditions (press release, 7 October 2008)
- The Federal Reserve's Commercial Paper Funding Facility (Staff Report 423)
spotted an error? The archive wants to know.