The Lehman Playbook Is Here: Fed Announces Bailout Of Commercial Paper Market - Here's The Bad News


It was supposed to be announced late on Sunday (recall "Fed Expected To Announce CP Bailout Facility Within Hours Or Risk Money Market Panic"), but instead Powell hoped that the bazooka of QE/ZIRP/FX swaps would be sufficient to ease the funding panic. It wasn't, and instead, with a 2-day delay which forced countless companies facing a funding shortage to scramble for liquidity and draw down on their revolver facilities, moments ago the Fed announced that, just as we reported earlier, it will establish a Commercial Paper Funding Facility (CPFF) - the same facility that was unveiled during the last financial crisis - "to support the flow of credit to households and businesses."

As the Fed explains...

Commercial paper markets directly finance a wide range of economic activity, supplying credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies. By ensuring the smooth functioning of this market, particularly in times of strain, the Federal Reserve is providing credit that will support families, businesses, and jobs across the economy. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase unsecured and asset-backed commercial paper rated A1/P1 (as of March 17, 2020) directly from eligible companies.

And since this is effectively a partial Fed bailout of corporate America, certainly its overnight funding needs, the Fed referred to authority granted to it under Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary, as now that the Lehman playbook is in play, the bailout of Corporate America is suddenly very political.

As noted above, this is not a new facility, but was first rolled out on October 7, 2008, right after the Lehman bankruptcy prompted Money Market funds to "break the buck" and a Fed bailout of CP was needed. After its start, the facility quickly saw usage jump to $350BN, before fading to zero over the next year as QE1 took over.

A list of companies that took advatnage of the first CFPP can be found at the following Fed link.

So fast forward over 11 years when a similar marketwide paralysis emerged, and when the Fed had some more observations on the lock up in the CP market, which as we explained on Sunday, prompted a gradual bank run within US money markets:

The commercial paper market has been under considerable strain in recent days as businesses and households face greater uncertainty in light of the coronavirus outbreak. By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market. An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak.

As part of the CP facility, the Treasury will provide $10 billion of credit protection to the Federal Reserve in connection with the CPFF from the Treasury's Exchange Stabilization Fund (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.

A brief description of the program is attached (see link). More detailed program terms and conditions and an operational calendar will be subsequently published.

Commercial Paper Funding Facility 2020: Program Terms and Conditions
Effective March 17, 2020


The CPFF2020 will be structured as a credit facility to a special purpose vehicle (SPV) authorized under section 13(3) of the Federal Reserve Act. The SPV will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers.

The Federal Reserve Bank of New York will commit to lend to the SPV on a recourse basis. The New York Fed will be secured by all the assets of the SPV. The U.S. Treasury Department—using the Exchange Stabilization Fund (ESF)--will provide $10 billion of credit protection to the FRBNY in connection with the CPFF.

Assets of the SPV

The SPV will purchase from eligible issuers three-month U.S. dollar-denominated commercial paper through the New York Fed’s primary dealers. Eligible issuers are U.S. issuers of commercial paper, including U.S. issuers with a foreign parent company.

The SPV will only purchase U.S. dollar-denominated commercial paper (including asset-backed commercial paper (ABCP)) that is rated at least A-1/P-1/F-1 by a major nationally recognized statistical rating organization (NRSRO) and, if rated by multiple major NRSROs, is rated at least A-1/P-1/F-1 by two or more major NRSROs, in each case subject to review by the Federal Reserve. 1

Limits per issuer

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 March 16, 2019 and March 16, 2020. 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.


Pricing will be based on the then-current 3-month overnight index swap (OIS) rate plus 200 basis points. At the time of its registration to use the CPFF, each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.

Termination date

The SPV will cease purchasing commercial paper on March 17, 2021, unless the Board extends the facility. The New York Fed will continue to fund the SPV after such date until the SPV’s underlying assets mature.
Now the bad news: commenting on the facility, TD Securities rates strategist Gennadiy Goldberg said that the fact that the spread on the Federal Reserve’s resurrected commercial paper funding facility at 3-month OIS+200bp is larger than it was in 2008, when it was 3-month OIS+100bp, which "may limit the efficacy of the facility."

Why? Because according to Goldberg, "the Fed is probably hoping banks go to the discount window while non-financial corporates go to this facility."

The seemingly punitive rate may also "limit how much relief the facility provides to FRA-OIS. This is the exact opposite of the approach the have taken via the repo facility, where repo amounts on offer are effectively unlimited," and begs the question why does the Fed keep shooting itself in the foot when on one hand it appears to be offering unlimited liquidity at least until one reads the fine print.

Now the really bad news: by launching the Lehman playbook, the Fed is telegraphing that the US is now facing systemic risk crisis which also includes the banks and corporations, something which was missing until now. Which is why after a brief kneejerk reaction higher, markets may fade it all and crash to new lows, especially if the market demands to see what if any other ammunition the Fed has left, with expectations that sooner or later the Fed will do as Yellen hinted three months ago when she said that the Fed will eventually have to buy stocks.