Little Noise, Big Results: Successful Bailout Programs

The public is focused on the Big Three auto companies and the controversial $700 billion Treasury bailout plan. Meanwhile, boring things, such as initiatives to financially support commercial paper, are actually making the most progress toward fixing our economy.

According to recent CNN/Money reports, the Treasury's $700 billion bailout is a major attention-getter these days.  However, two programs that lack the sensational headlines are perhaps making more headway toward helping mend economic problems.

Relevance of commercial paper

One of them is the Federal Reserve's Commercial Paper Funding Facility, which lets companies sell their debt obligations to the Fed in exchange for exceptionally low interest rates, at a time when banks and other institutions are reluctant to buy commercial paper. Commercial paper has historically been an especially boring type of debt product that doesn't experience dramatic price changes or volatile marketplace events. It's a lot like money market funds that retail customers use in their personal checking or savings accounts, except that commercial paper is designed for large companies.

When a business needs a short-term loan to pay the bills until the previous day's sales proceeds come in, it typically turns to a commercial paper broker. A company might borrow a few thousand or a few million dollars for one or two days, and then pay it back right away for a nominal amount of interest. The transactions have, for many years, been uneventful, predictable, and vital for the ongoing flow of commerce around the nation and throughout the world.

All that changed within the past few months, however, when the credit markets froze and lending stopped. Suddenly, commercial paper was scarce, because lenders were afraid to lend to companies that might suddenly go under much like AIG and Lehman Brothers did. Once the commercial paper stopped flowing like water, it caused major problems and a cash flow draught for corporate America. As a result, the Fed stepped in by buying about $10 billion of commercial paper per week, which bolstered investor confidence and helped to keep the gears of credit moving.

FDIC liquidity guarantee

Next came another little known plan, the FDIC Temporary Liquidity Guarantee Program. Under this initiative, the FDIC guarantees payment of certain kinds of newly-issued unsecured bank debt, in exchange for a small fee. The FDIC program is being used by financial giants, including GE Capital, JP Morgan Chase, and Bank of America. To date, the FDIC liquidity guarantees have backed more than $40 billion in bonds, and industry experts say that the FDIC plan might grow to cover more than $200 billion in guarantees.

While the debate over whether or not to bail out Detroit dominates the limelight, these other two low-key programs seem to be getting the job done. Corporate loans and various insurance products that back commercial debt are once again affordable and accessible.  They are letting business continue to function and keep the U.S. economy on track.