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October 6, 2008

Unintended Consequences: Fed to Ease Strains That it Created

Lest anyone think that having big-footed government beasties running through credit markets can happen without unintended consequences, think again. From a story in the WSJ about the Fed's plan to backstop the commercial paper market, this disturbing nugget:

In mid-September, the Fed unveiled a new lending program aimed at helping U.S. banks finance purchases of a kind of commercial paper called asset backed commercial paper, which is secured by collateral such as securities backed by mortgages or car loans.

The move was aimed at stabilizing money market funds that were being forced to dump illiquid or risky holdings as investors redeemed their money.

Some commercial paper brokers lamented that the Fed's backstop for the ABCP market may have at the same time reduced investor demand for unsecured commercial paper issued by many foreign banks and companies. So officials, who see strains in short-term funding markets as a dangerous development, are looking for ways to backstop this market, too.

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