Toolbox 2: Providing liquidity to key credit markets
Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF): This is a lending facility that provides funding to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper, or ABCP, from money market mutual funds that hold such paper in meeting demands for redemptions by investors and to foster liquidity in the ABCP market and money markets more generally. (Announced Sept. 19, 2008)Commercial Paper Funding Facility, or CPFF: This is intended to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets and thereby contribute to greater availability of credit for businesses and households. Under the CPFF, the Federal Reserve Bank of New York will finance the purchase of highly rated unsecured and asset-backed commercial paper from eligible issuers via eligible primary dealers. (Announced Oct. 7, 2008)
Money Market Investor Funding Facility, or MMIFF: This supports a private-sector initiative designed to provide liquidity to U.S. money market investors. Under the MMIFF, the New York Fed will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. (Announced Oct. 21, 2008)
Term Asset-backed Securities Loan Facility, or TALF: This is a funding facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities, or ABS, collateralized by student loans, auto loans, credit card loans, and loan guaranteed by the Small Business Association, or SBA. Under the TALF, the Federal Reserve Bank of New York will lend up to $200 billion on a nonrecourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The bank will lend an amount equal to the market value of the ABS less a haircut* and will be secured at all times by the ABS. (Announced Nov. 25, 2008)
"In contrast, the asset-backed securities program, a joint effort with the Treasury, is not purely for liquidity provision. This facility will provide three-year term loans to investors against AAA-rated securities backed by recently originated consumer and small-business loans. If the program works as planned, it should lead to lower rates and greater availability of consumer and small-business credit. Over time, by increasing market liquidity and stimulating market activity, this facility should also help to revive private lending."
Toolbox 3: buying long-term securities
The third set of policy rules involves the purchase of longer-term securities such as the direct obligations of housing-related government-sponsored enterprises -- Fannie Mae, Freddie Mac and the Federal Home Loan Banks-- and mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae.The Fed says that this action is being taken to reduce the cost and increase the availability of credit for the purchase of homes, which in turn should support housing markets and foster improved conditions in financial markets more generally. (Announced Nov. 25, 2008)
"We recently announced plans to purchase up to $100 billion in government-sponsored enterprise (GSE) debt and up to $500 billion in GSE mortgage-backed securities over the next few quarters. Notably, mortgage rates dropped significantly on the announcement of this program and have fallen further since it went into operation. Lower mortgage rates should support the housing sector."
Sources: Federal Reserve, Federal Reserve Bank of New York, Federal Reserve Bank of San Francisco, Federal Reserve Bank of St. Louis.
* In lending, a haircut is the difference between the value of a loan and the value of the collateral securing that loan. Source: Investorwords