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RANCHO RESORT MAINTANANCE POSITION Administrative & Professional Tucson Urban League CEO/President Mechanical Komatsu Equipment Co Resident Field Mechanic Finance and Accounting Charles E. Gillman Company Accounting Specialist Administrative & Professional Jorgensen Brooks Group Counselor Sales and Marketing Everready Glass Sales Reps BusinessFed swoops into credit marketsThe Associated Press
Tucson, Arizona | Published: 10.07.2008
WASHINGTON — The Federal Reserve announced Tuesday a radical plan to buy massive amounts of short-term debts in a dramatic effort to break through a credit clog that is imperiling the economy.
The Federal Reserve, invoking Depression-era power under "unusual and exigent circumstances," will buy "commercial paper," a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls.
The $99.4 billion daily market for this crucial financing, which relies on investors rather than banks, has virtually dried up. Most investors have become too jittery to buy paper for longer than overnight or a couple days.
That has made it increasingly difficult and expensive for companies to raise money to fund their operations. Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.
The unstable situation has left many companies vulnerable. The notion under the plan is for the government to provide a "backstop" that would give companies a new place to get cash, the Fed said. The action makes the Fed a source of credit for nonfinancial businesses in addition to commercial banks and investment firms.
The Fed's action initially helped lift investors' spirits. The Dow Jones industrials rose 145 points in early trading, a day after a huge selloff put the Dow below 10,000 for the first time in four years.
The Fed said it is creating a new entity to buy three-month unsecured and asset-backed commercial paper directly from eligible companies.
The Treasury Department, which worked with the Fed on the program, said the action is "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. It did not say how much.
If a company's commercial paper is not backed by assets or other forms of security acceptable to the Fed, the company could pay an upfront fee, the central bank said.
The Fed said it hoped its effort would jolt the commercial paper market back to life.
"This facility should encourage investors to once again engage in term lending in the commercial paper market," the Fed said. That should eventually spur financial companies to lend to each other and to their customers, including consumers, the Fed said.
The Fed said it planned to stop buying commercial paper on April 30, 2009, unless the Federal Reserve board agrees to extend the program.
There was $1.61 trillion in outstanding commercial paper, seasonally adjusted, on the market as of last Wednesday, according to the most recent data from the Fed. That was down from $1.70 trillion in the previous week. Since the summer of 2007, the market has shrunk from more than $2.2 trillion.
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