|
Edited on Fri Apr-10-09 08:12 AM by HamdenRice
Someone upthread already mentioned this but here are a few more details.
There are actually several bailouts. TARP is capital infusion into banks and is the most widely known, although the amount so far is "only" $350 billion.
The biggest part of the bailout has been by the Fed. The Fed injected up to $1.8 trillion into the commercial paper market. That was direct purchases of short term debt by a variety of corporations. We don't know which, but manufacturers and other employers routinely use commercial paper to fund payroll and inventories and even out cash flow. For example, companies get revenue all month, but pay payroll once, twice or four times a month; they need to borrow to "even out" their cash positions. In fact the freeze of the commercial paper market in September was why so many people thought a complete economic collapse could happen any moment.
There are two sides of the commercial paper market -- the borrowers (issuers) and the lenders.
Commercial paper is like a post dated check. If I'm a corporation and I need quick cash, I write a "check" (or issue commercial paper) for $100,000 that is dated 30 days from today. I sell that check at a discount -- maybe for $99,900. Someone buys that check. I now have $99,900 to meet payroll or buy inventory. 30 days from today, the buyer comes to me and demands payment. I pay back the $100,000. The "lender" has made $100 in interest.
The lenders in this market were "money market funds" which were ultra safe mutual funds that are treated like bank accounts by depositors, many of whom are retirees, but also other companies with excess cash. Money market funds are known for never, ever losing money. There were about $4 trillion in money market fund deposits as of September.
In mid September, Lehman defaulted on its commercial paper meaning that it could not pay commercial paper checks that were coming due, so money market funds lost that money. Several money market funds announced that they had "broke the buck" which meant that if you deposited one buck in a money market fund, you would get back less than a buck.
There was a run on money market funds, which lost upwards of a trillion dollars in a few day. Here in New York City, thousands of people lined up to take their money out of money market funds, as well as banks and other financial institutions. If that run had continued, companies all across the nation would not have been able to sell commercial paper for payroll and inventory and basically the American economy would have shut down overnight.
The Fed stepped in to guarantee money market funds. But the funds still wouldn't buy any more commercial paper.
So the Fed began buying commercial paper -- the equivalent of making direct loans to employers. That money has been recycled over and over since September and is probably the biggest and most effective part of the bailout.
All indications are also that the Fed made billions in interest, so that part of the bailout has actually been profitable to the government.
As the money markets return to normal, the Fed has eased itself out of the market, but still is has hundreds of billions in commercial paper transactions.
|