Just two weeks into its operation, the Fed’s commercial paper facility expanded by nearly $100 billion. The Fed now owns something like 15% of all the commercial paper outstanding, holding a total of $243 billion of the short term loans.
It’s unclear who is selling the commercial paper to the Fed. One guess is that it’s AIG, which has not been borrowing as much from the dedicated AIG facility as may have been anticipated given the size of its liabilities. AIG’s borrowings under the special facility actually dropped from $83.5 billion to $81.2 billion. In a sense, the Fed’s commercial paper facility may be operating as a hidden bailout of AIG.
The Fed expected that its participation in the commercial paper market would prime the pump for the market, encouraging other buyers to come in. So far that hasn’t happened. Commercial paper outstanding increased by $50.5 billion to $1.60 trillion last week, after rising by $100.5 billion in the previous week. This means that the market for commercial paper is actually shrinking while the Fed continues to borrow.
The Fed also said the amount of discount window borrowing fell to $108.6 billion, which is a slight down tick down the $110.7 billion outstanding as of a week ago. Borrowings from that Primary Dealer Credit Facility, which the Fed invented to provide liquidity to investment banks after Bear Stearns collapsed, also fell,to $71.6 billion from $79.5 billion.
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