Federal Reserve to buy up short-term commercial debt

WASHINGTON – Desperate to halt the panic sweeping financial markets, the Federal Reserve announced today that it would start buying up billions and perhaps more than a trillion dollars of short-term commercial debt.

Shortly before markets opened, the Federal Reserve said it would begin shortly to purchase “commercial paper,” a short-term financing mechanism that many companies rely on to finance their day-to-day operations.

Senior Fed officials said that roughly $1.3 trillion in three-month commercial paper would be eligible for purchase, roughly half of it from financial firms, which have been especially hard hit by the turmoil.

The officials said the aim of the program is to rebuild confidence of money market mutual fund operators in the commercial paper market. In recent days, they said, even solvent companies have not been able to issue debt with terms longer than a day or two.

The markets, which suffered another dismal trading day Monday, responded favorably in early trading. In the first hour of trading, the Dow Jones industrial average rose about 65 points to climb above the psychologically important level of 10,000 points. The market had closed at 9,955.50 on Monday.

“The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities,” the Fed said in a statement.

“As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day.”

Senior Fed officials said the central bank’s decision to start buying commercial paper should ease the “rollover” pressure on companies, particularly financial intermediaries who loan to businesses and households.

“By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market,” the Fed said.

Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.

Fed officials said the new credit facility would buy both secured and unsecured debt, at its discretion. Details are still to be worked out, but issuers of unsecured debt would have to pay a fee of some sort, perhaps a kind of insurance premium, to ease the risk on the central bank.

Officials did not announce a start date for the facility, but said it would be more likely to begin in weeks, not days.

The Treasury Department would assist the program by providing money to the Fed, but the size of the infusion and the details of how it would work were not yet determined, the officials said.

The Associated Press contributed to this report.