Friday, November 14, 2008

"pressing the Federal Reserve to expand purchases of commercial paper to include them"

Well, here we go. Anchors Away on government guarantees. Maybe there is something to this socialism idea after all. Via Bloomberg:

"Nov. 14 (Bloomberg) -- A group of companies including Textron Inc., Home Depot Inc. and Honda Motor Co. is pressing the Federal Reserve to expand purchases of commercial paper to include them, two people briefed on the matter said.

The coalition, which also counts Dow Chemical Co. and Nissan Motor Co. as members, wants the Fed to go beyond top-rated paper and buy debt with the second-highest grade, the people said on condition of anonymity. American Electric Power Co. Chief Financial Officer Holly Koeppel said the group is seeking to add more companies and preparing a letter to outline its case."

Preparing a letter. Is it more like a list of demands? Calling all politicians.

"Second-tier issuers of commercial paper, debt that matures in nine months or less and is a form of IOU for day-to-day expenses such as payrolls and rent, argue they're disadvantaged by the Fed's new Commercial Paper Funding Facility. "

Let's call this the " I'm Disadvantaged Argument. I Can't Get Up. Help Me!", principle.

Remember this yesterday on Yves Smith
:

"Without a similar guarantee, U.S. banks will be ``at a significant disadvantage'' to their U.K. and European counterparts because their government-backed debt will be more expensive for borrowers and less attractive to investors, the letter said."

Back to our story:

"While accepting lower-grade debt could reduce borrowing costs for a broader group of companies, it would also expose the taxpayer to greater risk. The request is one of a number of attempts to get a share of federal rescues, with industries from automakers to heating-oil retailers seeking funds.

``We are really creating a mindset where no one fails,'' said Adolfo Laurenti, a senior economist at Mesirow Financial Inc. in Chicago."

Let's go past tense here Adolfo.

``Manufacturers that have A-2/P-2 paper are getting nailed,'' Senator Bob Corker, a Tennessee Republican, said at a congressional hearing two weeks ago. ``All of a sudden, they're at a 500 basis-point disadvantage and basically getting ready to lay people off,'' he said, pressing Fed Governor Elizabeth Duke to revise the central bank's policy.

Fed's Objective

Duke responded to Corker that the Fed's objective was to get the market ``moving again,'' and once the top-tier portion is reenergized, ``then that will move the other parts of the market as well.''

The Fed has argued that limiting the program to the highest- rated securities provides protection for taxpayers."

Corker to Duke: I'm a politician. Get my contributors some of this TARP money or something similar fast. Otherwise, your decision looks arbitrary. I told Willem Buiter this yesterday. Once you give up moral hazard, expect decisions on where and when to intervene to look stupid and arbitrary.

``A lot of companies that qualify below the A-1/P-1 level are good performing companies,'' said Bill Himpler, executive vice president at the Washington-based American Financial Services Association.

The commercial-paper market was roiled by the failure of Lehman Brothers Holdings Inc. in September, which prompted money- market funds, among the biggest buyers of commercial paper, to retreat into the relative safety of government debt."

Lehman again. Didn't I say that lack of clearly enunciated principles and apparent arbitrariness of intervention are the main culprit that lead to the political avalanche against moral hazard.

"Laissez Les Bailouts Roulez"


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