Commercial Paper Funding Facility: So Far, So Good

The Federal Reserve opened the Commercial Paper Funding Facility for business today. It came off pretty much without a hitch. This facility buys commercial paper from issuers (such as GE) and will hold that paper. Today funding was about 70 basis points through Libor which is a pretty good deal.Next week the Federal Reserve Bank of New York will act through several special purpose vehicles and will provide liquidity to customers.

The money market trader whom I quote here often notes, however, that while the turmoil has subsided, the market could not function without an official imprimatur from the Federal Reserve as well as lots of money from the aforementioned central bank. The Federal Reserve is now the intermediary and without the long reach of that institution the system would have ceased to function.

The missing ingredient here is retail investors. My friend notes that the motivating force currently for many traders and portfolio mangers is job security. He does not think that the market can stand alone until 2009. In the interim there are no portfolio managers who will rush out and by a name for 10 or 15 basis points. If subsequent events prove you wrong, you will be pounding cement.

So if behavior is going to change it will not be until after the calendar reads 2009 and traders are operating with a tabula rasa.