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Fed eyes plan to fund short-term business loans
The government is weighing a bold plan to buy massive amounts of unsecured short-term debts in a dramatic effort to break through a credit clog that is imperiling the economy.The Federal Reserve is working with the Treasury Department on the plan to 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, according to a person with knowledge of the plan. The person spoke on condition of anonymity because the plan is still being put together. The market for this crucial financing, which relies on investors rather than banks, has virtually dried up. 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 come up with a backstop that would provide companies with a new place to get cash. Depending on the ultimate shape of the plan, the Fed could become a source of credit for nonfinancial businesses in addition to commercial banks and investment firms. The Fed made an opaque reference on Monday that it was exploring "ways to provide additional support" to "unsecured funding markets." The creation of a separate legal entity was being examined as one way for the Fed to get into the commercial paper market, the person with familiar with the plan said. Posted by: ed 2008-10-07 |
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