Fed Loans $540 Billion to Bail Out Money Market Funds

The Federal Reserve announced it will lend $540 billion to allow money market funds to have enough cash to meet a continuing barrage of redemptions. Since August, over $500 billion has been withdrawn from money markets, which is where most businesses park their overnight cash. Businesses have been hoarding cash because LIBOR rates have been high, since banks have been reluctant to make loans.

The Fed's Money Market Investor Funding Facility (MMIFF) will be managed by JPMorgan Chase. The MMIFF will purchase up to $600 billion of certificates of deposit, bank notes and commercial paper that comes due within the next 90 days. The remaining $60 billion will come from the money markets themselves, who must purchase commercial paper from the MMIFF.

On September 19, the Fed established the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), which has loaned $122.8 billion to banks to buy commercial paper from money market funds. There was $122.8 billion of such loans outstanding as of Oct. 15. On September 21, the Treasury guaranteed $50 billion worth of money market funds. The fact that the Fed has announced this new purchase program shows that credit markets are still partially frozen. (Source: Federal Reserve, Press Release, October 21,2008; Bloomberg, Fed to provide $540 billion to aid money funds, October 21, 2008)

Related Articles

• Bank Bailout Bill Alternatives
• Could the Mortgage Crisis and Bailout Have Been Prevented?
• Federal Intervention in the Banking Panic