Wednesday, 17 September 2008

What? Another financing facility

The US treasury just made the following announcement:

"The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program, which will provide cash for use in the Federal Reserve initiatives."

The announcement didn't say how much this "temporary" facility would provide, but presumably its first task will be to finance the AIG nationalisation. Yesterday, the Fed agreed to provide a whopping $85 billion credit line, while at the same time taking an 80 percent stake on the company.

Judging by the terms of this loan, the Fed really laid one on the AIG management. This is what the press release reported:

"The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility."

On September 10th (the last day I have data), the three month US dollar LIBOR rate was 2.82. So, the Fed are going to charge an interest rate of 10.32 on this baby.

I wish I could get a interest rate like that on a two year deposit.


Rebecca Wilder said...

Hey Alice,

How about paying just 0.2% (U.S. 3-month T bill yield as of 2:23pm) to borrow for 3 months when inflation rests at 5.4% over the year? Or what about 1.62% for a 2 year loan???

Thanks for the info!

Alice Cook said...


There is nothing more symptomatic of a sick economy than negative interest rates.

Thanks for the kind words.


mike said...

Where is all this money the Fed are loaning coming from! Surely they can't keep bailing out companies.

After reading a recent FT article it sounds like they are running out of money:

The Fed is surely no match to bail out everyone.

Anonymous said...

This has "japanese liquidity trap" written all over it. The Fed destroyed it's balance sheet and now goes to the Treasury for a bailout.

It's NOT inflationary.


Anonymous said...

It'll not end up a liquidity trap as the US Gov is bypassing the banks and giving out stimulus checks directly.

Not that it makes any difference.

The US is insolvent - just ask the ex-Comptroller General David Walker. But even when you're insolvent, you can keep borrowing until bankruptcy.

I suppose the definition of bankruptcy is when people won't lend to you any more.

Anonymous said...

I think the capitalists have gone on strike this week. Not quite in the Atlas Shrugged sense, but basically everyone with money has decided to abandon risk capital and rush for the exits. The result is the same - businesses can't expand and struggle to continue.

It needs to happen.

as for the US insolvency. Just look at CDS spreads on Treasuries. Up from non-existent to 30bps