Summary

  • Section 13(3) of the Federal Reserve Act, a product of the Depression Era, permits emergency lending to bank and nonbank companies by the Federal Reserve.
  • On October 27, 2008, the Federal Reserve established the Commercial Paper Funding Facility (CPFF) in response to the frozen global credit facilities resulting from the collapse of Lehman Brothers and the government bailout of AIG.  CPFF was the mechanism for broader programs like the Term Securities Lending Facility (TSLF), Term Asset-Backed Securities Loan Facility (TALF), and CPFF.
  • Under the Dodd-Frank Act, Congress narrowed that authority so that lending must be made in connection with a “program or facility with broad-based eligibility”; cannot “aid a failing financial company” or “borrowers that are insolvent”; and cannot have “a purpose of assisting a single and specific company avoid bankruptcy” or similar resolution.  Additionally, the Federal Reserve cannot establish a section 13(3) program without the prior approval of the secretary of the Treasury.
  • The commercial paper market is under significant stress with challenging and vanishing liquidity under the COVID-19 outbreak here and globally.  Today, the Federal Reserve announced the creation of a special purpose vehicle (SPV) that is to last at least for one year.  The SPV will purchase unsecured and asset-backed commercial paper rated A1/P1 directly from eligible companies.
  • The Gold Reserve Act of 1934 provides the authority for the Treasury to set up an Exchange Stabilization Fund (ESF) which provides, in part, that the Treasury “has a stabilization fund …consistent with the obligations of the Government in the International Monetary Fund (IMF) on orderly exchange arrangements and an orderly system of exchange rates, the Secretary …, with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities.”
  • The Treasury will provide $10 billion of credit protection to the Federal Reserve in connection with the CPFF from the ESF. The Federal Reserve will then provide financing to the SPV under the CPFF. Its loans will be secured by all of the assets of the SPV.

 

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