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.