CPFF data released

The Fed just recently released the detailed data behind all of the usage of the Federal Reserve Credit and Liquidity Facilities. I am interested in the Commercial Paper Funding Facility (CPFF) data.

To remind you the function of the CPFF, here is the official definition from the Fed:

Under the program, the Federal Reserve Bank of New York (FRBNY) provided three-month loans to the CPFF LLC, a specially created limited liability company (LLC) that used the funds to purchase commercial paper directly from eligible issuers. The commercial paper that was eligible for purchase was highly rated, U.S. dollar-denominated, unsecured and asset-backed commercial paper with a three-month maturity. To manage its risk, the Federal Reserve required issuers whose commercial paper was purchased by the CPFF LLC to pay fees at the time of each purchase. Additionally, at the time of the initial registration, each issuer was required to pay a facility fee equal to 10 basis points of the maximum amount of commercial paper that it could issue to the CPFF LLC. A total of $849 million in fees were collected by the CPFF LLC. The FRBNY's loan to the CPFF LLC was secured by all of the LLC’s assets, including its commercial paper holdings, accumulated fees, and proceeds from investments.

The CPFF was created by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, which permitted the Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations. The facility was administered by the FRBNY.

The facility was announced on October 7, 2008, began purchases of commercial paper on October 27, 2008, and was closed on February 1, 2010. The last of the CPFF LLC's commercial paper holdings matured on April 26, 2010, and the CPFF LLC was dissolved on August 30, 2010. All loans that were made to the CPFF LLC were repaid in full, in accordance with the terms of the facility, and all of the commercial paper that the CPFF LLC purchased was repaid in accordance with the stated terms.

In looking at the data, the old 80/20 Pareto rule holds true for this facility...where 80% of the purchases were provided to 20% of the total number of recipients...here is the list:

Source: Federal Reserve website

CPFF - Comercial Paper Funding Facility

In the recent assignment to calculate the total cost of the financial crisis, I was assigned CPFF.

The Federal Reserve created the Commercial Paper Funding Facility (CPFF) to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF was intended to improve liquidity in short-term funding markets and thereby contribute to greater availability of credit for businesses and households. Under the CPFF, the Federal Reserve Bank of New York financed the purchase of highly rated unsecured and asset-backed commercial paper from eligible issuers via eligible primary dealers. The CPFF began operations on October 27, 2008, and was closed on February 1, 2010.

The CPFF was created because the commercial paper market has been under considerable strain in the early weeks of the crisis 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. As a result, an increasingly high percentage of outstanding commercial paper needed to be refinanced each day, interest rates on longer-term commercial paper have increased significantly, and the volume of outstanding commercial paper has declined. A large share of outstanding commercial paper is issued or sponsored by financial intermediaries, and their difficulties placing commercial paper have reduced their ability to meet the credit needs of businesses and households.

The CPFF provided a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase eligible three-month unsecured and asset-backed commercial paper from eligible issuers using financing provided by the Federal Reserve Bank of New York (New York Fed). The SPV will hold the commercial paper until maturity and will use the proceeds from maturing commercial paper and other assets of the SPV to repay its loan from the New York Fed.

Authorized: The maximum amount of a single issuer’s commercial paper the SPV may own at any time will be the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between January 1 and August 31, 20081. The SPV will not purchase additional commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer’s limit.

Peak Spending: $349.94 Billion

Current: Zero, facility is closed

Below is the chart of the CPFF spending over time.

I would argue that the creation of the CPFF was a success during the crisis to help contain the crisis to the holders of the toxic assets rather than a extended credit freeze in the commercial paper market. Many non-financial companies fund their operations through the constant access of the commercial paper market and stabalizing this market was a clear success of the Federal Reserve.

Source: Federal Reserve website

Notes on "Funding Liquidity Risk and the Cross Section of Stock Returns"

Unable to attend the Tobias Adrian presentation of his paper at the Marcoeconomics seminar, I still that this was a very interesting paper to read.

In "Funding Liquidity Risk and the Cross-Section of Stock Returns" by Tobias Adrian and Erkko Etula, they show that funding liquidity risk constitutes an important risk factor for the cross-section of stock returns. They first define funding liquidity by constructing an intertemporal capital asset pricing model with two types of investors, active and passive. Their model links the active investors as a depiction of economy-wide funding conditions. With three observable variables of the active and passive investor, they established a new three-factor asset pricing model.

After setting up the model, the second part of the paper tests the theory. The model performs very well, especially in the problematic portfolios of the 30 industries portfolios. This result has eluded that a portfolio choice of an active investor sets up the expectation of the future.

My initial thoughts on Brunnemeir and Sannikov paper

Unable to attend to see Markus K. Brunnemeier at the Rutger seminar to discuss one of his current papers in progress "A Marcoeconomic Model with a Financial Sector", I still wanted to provide my comments on the paper.

After reading the paper and the published slides by Brunnemeier and Sannikov, I learned that this most recent financial crisis wasn't the first and will probably not be the last in this sector and have occurred at roughly 10-year intervals becoming less common with the role of the central bank. The paper puts the financial sector at the center of the model as the financial intermediaries are leveraged similar to certain young entrepreneurial firms.

With the financial sector and leverage in the system, the model moves money from less productive agents to more productive agents. This is where Brunnemeier introduces the concept of inside money in addition to the outside money of the system. With the inside money, Brunnemeir comments that an essential ingredient of the model is that any expert who manages capital must absorb at least a fraction of risk that affects the value of the capital.

That is where leave my initial thoughts around the Brunnemeier paper but I still see value in digging into the amplification effect on the overall system. For those who are interested in the slides on this work, here is the link...slides for A Marcoeconomic Model with a Financial Sector.

Comment on Blog post from "Some Ideas in Financial Economics"

In reading the recent post http://www.eden.rutgers.edu/~gaoch/econ514.html, I do agree with the comments around the impacts of outsourcing of certain industries but I would argue that the demographics of the workforce has a bigger impact on the lack of the improvement in the nonfarm payroll employment data.

With the baby boomer generation entering the early retirement age, I feel there is a large impact of individuals rolling right into retirement after a layoff rather than re-entering the workforce.

Deficit crosses above 10% GDP, a level not seen since World War II

With the recent monthly release of the US Federal Budget deficit by the Congressional Budget Office, 2010 is shaping up to break the record for the largest federal budget deficit projected at approximately $1.5 Trillion (Figure 1.0). This will send the % to GDP metric above the 10%+ mark, the highest level since the World War II range of 22%-28% in 1943-1945.

Figure 1.0 - US Federal budget deficit

With the frequency of US debt issuance at these historical low rates, one has to question when the future credibility and reliability of the US economy. The US government is placing a huge bet on reviving the economy with a large dose of stimulus funding, but with the market continue to have patience as the currently approved stimulus has run its course? And what will be the reaction of yet another stimulus package?

There will be a time of reckoning as the the current yields will not be enough reward as the deficit grows and other foreign investors (ie. China) will want to diversify their holdings away from a concentrated US Treasury portfolio. Only time will tell, but many others do agree and have posted similar concerns on the below blogs:

Kurt Brouwer at Seeking Alpha

Peter Suderman at Reason.com

First Post

Welcome All to Econ 514 -

This is a blog dedicated to post and publish my thoughts and analysis for my Economics 514 Graduate class at Rutgers University.

Stay tuned for some more postings.

Elias