Programs quietly easing credit crunch

The government has initiated two corporate debt-purchasing programs that have gotten little attention, but are making a sizeable impact in the credit market.

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By David Goldman, staff writer

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NEW YORK ( -- Treasury's $700 billion bailout has gotten most of the nation's attention, but some of the government's lesser-known programs are doing their part to help ease credit as well.

Two new government programs aimed at easing short-term liquidity concerns for financial institutions have started to take hold. The first, the Federal Reserve's Commercial Paper Funding Facility, allows companies to sell highly rated 3-month debt to the government in exchange for ultra-low interest rates.

A Fed report released Thursday showed that the key market for business lending has expanded for the sixth straight week.

The amount of so-called commercial paper that was sold in the seven days ended Dec. 3 rose by $11.6 billion, or 1%, to a seasonally adjusted $1.7 trillion, the report said.

Commercial paper is short-term debt that big businesses and financial institutions issue to fund day-to-day business operations. Long considered a safe and liquid investment, the debt is bought chiefly by conservative investors such as money-market funds.

But when the credit crisis hit in mid-September, funds began to invest in even safer assets, leaving many businesses in dire need of short-term financing.

"Investment committees for money market funds were worried that they might be investing in the next Lehman," said Bill Larkin, portfolio manager at Cabot Money Management. "They got out of the commercial paper market, and now they're buying mostly government bonds."

As a result, on Oct. 20, the Fed began buying up commercial paper to help businesses meet their funding needs.

A separate Fed report showed that the government bought nearly $10 billion of commercial paper over the past week. It was the second week in a row in which the overall market expanded faster than the Fed's weekly purchase rate, suggesting the program has begun to attract private borrowers.

"The program has helped, but the commercial paper market may never come back to the way it was," Larkin said. "That's where the FDIC's new program can fill the void."

FDIC program gains support

That second program, the Temporary Liquidity Guarantee Program, allows the FDIC to guarantee the payment of newly issued unsecured bank debt with greater than a one-month maturity, in exchange for a nominal fee.

The FDIC will guarantee a bank's issuance of debt, usually in the form of corporate bonds, for up to 125% of a bank's total debt outstanding as of Sept. 30 that was scheduled to mature on or before June 30, 2009.

In just its second week, the FDIC's guarantee program has attracted numerous participants, including Citigroup (C, Fortune 500), General Electric (GE, Fortune 500)'s finance division GE Capital, JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), Bank of America (BAC, Fortune 500) and Goldman Sachs (GS, Fortune 500), which only two months ago applied for "bank holding company" status so it could receive government aid for banks.

Bank of America has issued $9 billion in bonds under the program. Citi issued $5.5 billion, and Goldman and JPMorgan issued $5 billion. Wells Fargo sold $6 billion. GE has not yet issued bonds, though it said it was approved for $139 billion of FDIC guarantees.

The program has thus far guaranteed more than $40 billion in bonds, and Larkin believes the program will eventually guarantee more than $200 billion.

Early indications show the plan is working. Corporate bond yields are down, making lending cheaper for businesses. And credit default swaps, insurance contracts on debt, are also much less expensive.

For instance, credit default swaps on Citigroup bonds were running at about 5% of the bond's price just before the program started, and the insurance cost just 2.6% Thursday.

The guarantee program will remain critically important if companies remain unable to finance short-term debt through the commercial paper market after the Fed program expires. Larkin believes the FDIC program could help in the long run when the commercial paper market might not be able to.

"Risk-averse people are happy, because they're really looking for places to put their money," said Larkin "The FDIC program is giving institutions access to these crucial markets again." To top of page

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