THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 491

CHAPTER 17

rary facility, the Asset-Backed Commercial
Paper Money Market Mutual Fund Liquidity
Facility (AMLF), in which the Fed would lend to
primary dealers so that they could purchase
asset-backed commercial paper from money
market mutual funds. By so doing, money market mutual funds would be able to unload their
asset-backed commercial paper when they
needed to sell it to meet the demands for
redemptions from their investors. A similar facility, the Money Market Investor Funding Facility
(MMIFF), was set up on October 21, 2008, to
lend to special-purpose vehicles that could buy
a wider range of money market mutual funds
assets. On October 7, 2008, the Fed announced
another liquidity facility to promote the smooth
functioning of the commercial paper market
that had also begun to seize up, the Commercial
Paper Funding Facility (CPFF). With this facility,
the Fed could buy commercial paper directly
from issuers at a rate 100 basis points above the
expected federal funds rate over the term of the
commercial paper. To restrict the facility to rolling
over existing commercial paper, the Fed stipulated that each issuer could sell only an amount
of commercial paper that was less than or equal
to its average amount outstanding in August
2008. Then on November 25, 2008, the Fed
announced two new liquidity facilities, the Term
Asset-Backed Securities Loan Facility (TALF), in
which it committed to the financing of $200 billion (later raised to $1 trillion) of asset-backed

Tools of Monetary Policy

459

securities for a one-year period, and a
Government Sponsored Entities Purchase
Program, in which the Fed made a commitment
to buy $100 billion of debt issued by Fannie Mae
and Freddie Mac and other governmentsponsored enterprises (GSEs), as well as $500 billion of mortgage-backed securities guaranteed by
these GSEs.
In the aftermath of the Lehman Brothers failure, the Fed also extended large amounts of
credit directly to financial institutions that
needed to be bailed out. In late September, the
Fed agreed to lend over $100 billion to prop up
AIG and also authorized the Federal Reserve
Bank of New York to purchase mortgagebacked and other risky securities from AIG to
pump more liquidity into the company. In
November, the Fed committed over $200 billion
to absorb 90% of losses resulting from the federal government s guarantee of Citigroup s risky
assets; in January it did the same thing for Bank
of America, committing over $80 billion.
The expansion of the Fed s lender-of-lastresort programs during the subprime financial
crisis was indeed remarkable, expanding the
Fed s balance sheet by over $1 trillion by the
end of 2008, with expectations that the balancesheet expansion would be far higher. The
unprecedented expansion in the Fed s balance
sheet demonstrated the Fed s commitment to
get the financial markets working again.

*Technically, the purchase of these assets was in effect done with a non-recourse loan of $30 billion to J.P. Morgan, with

the Fed bearing all the downside risk except for the first $1 billion, while getting all the gains if the assets were eventually
sold for more than $30 billion. The effective purchase of commercial paper under the Asset-Backed Commercial Paper
Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, and the Government Sponsored
Entities Purchase Program was also done with non-recourse loans. Purchasing assets in this way conforms to section 13(3),
which allows the Fed to make loans, but not purchase assets directly.