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Economic SYNOPSES
short essays and reports on the economic issues of the day
2009 ■ Number 18

The Success of the CPFF?
Richard G. Anderson, Vice President and Economist*
n October 7, 2008, the Federal Reserve announced
the creation of the Commercial Paper Funding Facility
(CPFF). The CPFF purchases, through a specialpurpose vehicle funded by the Federal Reserve Bank of New
York, 91-day unsecured and asset-backed A1/P1-rated commercial paper (CP). The special purpose vehicle purchases the
paper at a discount such that, when held to maturity, its rate
of return equals a specified spread over the 3-month overnight
index swap (OIS) rate on the day of purchase.1 The CPFF,
which first purchased CP on October 27, 2008, and currently
is scheduled to cease purchases on October 31, 2009, has been
cited by Federal Reserve officials as a hallmark of success for
Federal Reserve “credit easing” programs.2
CP is a short-term promissory note issued by a corporation
that may be a less costly source of funds than bank loans,
despite being intertwined with the issuer’s banking relationships.3 Generally, purchasers of CP look with favor on an
issuer’s established banking relationships, because these relationships are a resource to repay the holders if the paper cannot
be rolled over. For less-creditworthy issuers, investors might
ask that bank-issued letters of credit be attached directly to
the paper, such that the bank is obligated to pay the holder at
maturity. More recently, asset-backed CP has been sold with
attached assets other than bank letters of credit. Most often,
the attached assets are themselves financial assets, including
auto and consumer loans. The CPFF buys only 91-day maturity
CP. In 2008, CP with maturity longer than 81 days comprised
only 7 percent of all issuance; the most common maturities,
in order of relative share in issuance, are 1 to 4 days, 30 days,
and 91 days.
The CP market came under stress in mid-September 2008
when Lehman Brothers failed and, the following day, the
Reserve Fund (America’s oldest money market mutual fund)
“broke the buck” (that is, the net asset value per share fell in
a single day by more than half of 1 percent). Thereafter, some
large CP purchasers (including money market mutual funds)
scaled back acquisitions, and some large CP issuers encountered
difficulty obtaining commercial bank support (in part, due to
concerns that the firm would be unable to roll over the paper
at maturity). Anecdotal evidence suggested that longer-term
paper was difficult to place, even at elevated rates.4 Because
more than 90 percent of CP is issued by financial firms, including auto and consumer finance companies, credit flowing to

O

businesses and households is disrupted when these firms
experience difficulty selling paper.
The chart displays weekly issuance of 91-day CP (A1/P1
and A2/P2) between September 2008 and February 2009—
and, for comparison, aligned weeks in 2006-07 and 2007-08.
Issuance decreased sharply during September 2008, but
increased steadily during October. During its first two weeks
(October 29 and November 5, 2008), the CPFF purchased the
overwhelming majority of all newly issued 91-day CP; yet, nonCPFF issuance remained comparable to that of surrounding
weeks. In subsequent weeks, the CPFF purchased little CP.5
Purchases jumped again in the weeks of January 28 and
February 4, 2009, when previously purchased issues of 91-day
paper matured. Thereafter, the CPFF again became a small
force in the market. Year-to-year comparisons show a surprising
result: Weekly issuance of 91-day CP during 2008-09 differed
little from comparable weeks in 2006-07 and 2007-08. Undoubtedly, the paper market was under strain during 2008-09, and
anecdotal reports suggest that longer-maturity paper became
difficult to place. Yet, aggregate issuance changed little.

“The CPFF is regarded as a hallmark of
success among credit-easing policies.”
At face value, the data suggest a small role for the CPFF.
But that may be too simple. First, it is clear that the CPFF
assisted year-end financing. Second, funding A1/P1 CP through
the CPFF is relatively expensive, at 200 basis points above the
OIS rate; anecdotal reports suggest that larger A2/P2 issuers
increasingly are able to place 30-day CP at a total cost of 250
to 300 basis points. Third, the CPFF announcement followed
the creation of two support programs for money market mutual
funds, which are important buyers of CP: the Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity
Facility on September 19 and the Treasury’s Temporary
Guarantee Program for Money Market Mutual Funds on
September 29. Both likely took some wind from the sails of
the CPFF. Finally, during February 2009, some previous CPFF
customers are reputed to have obtained financing through the
FDIC’s Temporary Liquidity Guarantee Program introduced
on October 14, 2008.6

Economic SYNOPSES

Federal Reserve Bank of St. Louis

2

Commercial Paper Issuance (A1/P1 and A2/P2)
(weekly data, aligned weeks, September 2008–February 2009 and previous years)
$ Billions
180

160

2006

2007

2007

2008

2008

2009

140

120
CPFF
100
NonCPFF
80

60

40

20

/0
8
9/
24
/0
8
10
/1
/0
8
10
/8
/0
8
10
/1
5/
08
10
/2
2/
08
10
/2
9/
08
11
/5
/0
8
11
/1
2/
08
11
/1
9/
08
11
/2
6/
08
12
/3
/0
8
12
/1
0/
08
12
/1
7/
08
12
/2
4/
08
12
/3
1/
08
1/
7/
09
1/
14
/0
9
1/
21
/0
9
1/
28
/0
9
2/
4/
09
2/
11
/0
9
2/
18
/0
9

/0

17
9/

10
9/

9/

3/

08

8

0

SOURCE: Federal Reserve Board.

2008-09 Dates Shown (2006-07 and 2007-08 similar)

In short: Was the CPFF a success in stabilizing the CP market, or was the CPFF an unneeded government intervention?
It does seem likely that the existence of the CPFF, even if not
used, backstopped the market, particularly with respect to the
risk that firms might not be able to roll over maturing paper
elsewhere. The plethora of overlapping Federal Reserve,
Treasury, and FDIC programs makes judgment difficult. In
any case, the CPFF deserves high marks for providing funding
over year-end. It is less clear that the CPFF revived the paper
market, with its share of new issuance being modest except
for its first two weeks. ■
1 The provisions are more complex than summarized here. For example, unsecured
paper is discounted at a 100-basis-point spread over the OIS rate (often, in market
transactions, the OIS rate is the effective federal funds rate) plus a 100-basis-point
surcharge. For details, see the Federal Reserve Bank of New York website on the
CPFF: www.newyorkfed.org/markets/cpff.html.
2 Bernanke, Ben S. “The Crisis and the Policy Response.” The Stamp Lecture,
London School of Economics, London, England, January 13, 2009; and “Federal

Reserve Programs to Strengthen Credit Markets and the Economy,” Testimony
before the Committee on Financial Services, U.S. House of Representatives,
Washington, DC, February 10, 2009.
3 For background, see Stigum, Marcia. The Money Market. Homewood, IL: DowJones Irwin, 1990; Hahn, Thomas K. “Commercial Paper” in Timothy Q. Cook and
Robert K. Laroche, eds., Instruments of the Money Market. 7th edition. Richmond,
VA: Federal Reserve Bank of Richmond, 1993, pp. 105-27. Kavanagh, Barbara;
Boemio, Thomas R. and Edwards, Gerald A. Jr. “Asset-Backed Commercial Paper
Programs.” Federal Reserve Bulletin, February 1992, pp. 107-16; and Post, Mitchell A.
“The Evolution of the U.S. Commercial Paper Market Since 1980.” Federal Reserve
Bulletin, December 1992, pp. 879-91.
4 Covitz, Dan and Downing, Chris. “Liquidity or Credit Risk? The Determinants
of Very Short-Term Corporate Yield Spreads.” Journal of Finance, October 2007,
62(5), pp. 2303-28.
5 The data, published by the Federal Reserve Board and supplied by the
Depository Trust & Clearing Corporation, cover almost all activity in the paper
market. Covitz and Downing (2007) further describe these data.
6 A timeline of actions by various agencies is available at http://timeline.stlouifed.org.
*He is also a visiting scholar at the School of Business, Aston University,
Birmingham, U.K.

Posted on April 7, 2009
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

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