WASHINGTON – The Federal Reserve announced new initiatives yesterday to pump liquidity into the economy as the financial markets around the world continued to dive again.
The Fed, which announced plans Monday to pump as much $900 billion more into the banking system, said yesterday it will also buy short-term debt, mostly commercial paper from banks and credit unions to help ease the liquidity crunch in the commercial paper markets.
Commercial paper is short-term IOUs from top-ranked corporations and is among the variety of illiquid investments being held by the nation’s corporate credit unions, also stuck with billions in underwater mortgage backed securities. Some corporates also sell their own commercial paper to investors in order to raise funds.
U.S. Central FCU, for example, held $979 million worth of commercial paper at Aug. 31. On the other side, Corporate One FCU had issued $602 million of commercial paper and other borrowings, Southeast Corporate FCU had issued $220 million of notes and commercial paper, and Members United Corporate FCU had $12 million in commercial paper outstanding, all at Aug. 31.
Some state chartered natural person credit unions also hold commercial paper, which is prohibited for federal charters.
Yesterday’s Fed action came a day after the central bank announced it will start paying banks and credit unions interest on so-called sterile reserves the institutions deposit with it in order to gain access to its emergency lending discount window. Banks have long sought interest on their sterile reserves, which was finally enabled by last week’s $700 bailout bill.
The Fed also said it would expand its short-term loan program for banks and credit union affected by the credit crunch.
Fed officials said they hope the new initiatives will help slow the credit crunch until the central bank begins buying toxic mortgages from banks and credit unions under the $700 billion bailout approved by Congress last week.
Meantime, the equity markets continued to crash again yesterday, with the Dow Industrial Average closing down another 508 points, bringing its two-day decline to 875 points.
The crisis was also growing overseas, with the British government unveiling plans to buy shares in its troubled banks, Germany and France unveiling new emergency efforts, and Iceland’s biggest bank agreeing to an emergency $4 billion bailout loan from the Russians.
