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Wed, Oct 08, 2008 - Page 10 News List

US government mulls ‘commercial paper’ business

AP , WASHINGTON

The US government is weighing a bold plan to buy massive amounts of unsecured short-term debts in a dramatic effort to break through a credit clog that is imperiling the economy.

The Federal Reserve is working with the Treasury Department on the plan to buy “commercial paper,” a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls, according to a person with knowledge of the plan. The person spoke on condition of anonymity because the plan is still being put together.

The market for this crucial financing, which relies on investors rather than banks, has virtually dried up. That has made it increasingly difficult and expensive for companies to raise money to fund their operations. Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.

The unstable situation has left many companies vulnerable. The notion under the plan is for the government to come up with a backstop that would provide companies with a new place to get cash.

Depending on the ultimate shape of the plan, the Fed could become a source of credit for nonfinancial businesses in addition to commercial banks and investment firms.

The Fed made an opaque reference on Monday that it was exploring “ways to provide additional support” to “unsecured funding markets.”

The creation of a separate legal entity was being examined as one way for the Fed to get into the commercial paper market, the person familiar with the plan said.

The Fed pledged on Monday to take “additional measures as necessary” to battle the worst credit crisis in decades. Wall Street took a nosedive, with the Dow Jones industrials plunging more than 800 points at one point during the day before finishing down 370 points. Fears spread around the globe about the ability of policymakers in the US and abroad to turn the situation around.

A growing number of economists and investors believe the Fed will be forced to do an about-face and lower its key interest rate, now at 2 percent, on or before its meeting on Oct. 28 and Oct. 29.

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