The Federal Reserve said Tuesday it is providing help to companies that are having a hard time getting the short-term funding they need to operate.
In a move much anticipated on Wall Street, the bank announced a special credit facility to purchase corporate paper from issuers that have been having a difficult time finding buyers on the open market. Corporate paper involves unsecured short-term lending critical to business funding.
“This is a crucial market for basically short-term borrowing by companies, and if you don’t get this short-term borrowing, you can’t get payments out, you can’t pay your employees, you can’t pay your customers,” Randall Kroszner, a former Fed governor, told CNBC. “If this freezes up, it’s a real problem.”
The one-day facility, under the Fed’s emergency 13(3) powers of the Federal Reserve Act, will involve three-month paper for eligible companies. The cost will be the three-month overnight index swap rate plus 200 points.
For the Fed’s purpose, it creates what is called a special purpose vehicle that is guaranteed through the Treasury Department for $10 billion.
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