Real definitions, with a little bit of “Unknown History” [that means we’re kidding, at least sort of] and apologies to Dick Fuld, Dunkin Donuts and anyone who knows the truth!
The Federal Reserve Discount Window
REAL: Commercial banks use the discount window to borrow money overnight from the Federal Reserve in exchange for collateral when they are unable to borrow funds from other banks.
HISTORY: The Federal Reserve Act of 1913 created the discount window as a way to dispense free donuts to bankers who lost vast fortunes in the Great Donut Disaster of 1907. (See HISTORY OF DONUTS by Fred Dunkin. 1987 HarperCollins). By 1913, the donut market had fully recovered and, with no bankers lining up for donuts, the Fed changed policy and began issuing dollars through the discount window. The discount window is also considered the first “drive-thru window” in the United States, as bankers used to pull up in very large limousines to place their orders, a practice that continues to this day.
TAF Term Auction Facility
REAL: Commercial banks can borrow money in exchange for collateral from the Federal Reserve’s TAF, Term Auction Facility, for periods of 28 to 84 days at interest rates determined by an auction of the available funds.
HISTORY: The Federal Reserve created the TAF in 2007 to address the credit and liquidity crisis that was depleting cash at banks worldwide. The TAF provides money to banks for longer periods of time than is provided at the discount window. The name Term Auction Facility was derived by a Federal Reserve college intern who, while writing a term paper on funding opportunities, had to go to the bathroom and, while using the facilities, came up with the idea for the TAF. The intern received a B+ on the paper.
TSLF Term Security Lending Facility
REAL: The Federal Reserve created the TSLF, Term Security Lending Facility, on March 11, 2008, to lend money for periods of 28 to 84 days to primary dealers -- investment banks -- designated by the Federal Reserve to deal and trade U.S. Treasurys.
HISTORY: The Federal Reserve created the TSLF in March 2008 during the Bear Stearns crisis as a way to provide funds to investment banks that did not have access to the discount window or TAF. While similar to the TAF, the TSLF is considered a much cooler way to borrow money because it has more letters in its acronym.
PDCF Primary Dealer Credit Facility
REAL: The PDCF, Primary Dealer Credit Facility, provides overnight loans to investment banks in exchange for collateral.
HISTORY: The PDCF was created on March 16 to give investment banks such as Bear Stearns, access to overnight loans. Investment banks do not have access to the commercial bank discount window. To show its incredible appreciation, the Bear Stearns board of directors donated $29 billion of triple-A rated mortgage-backed securities to the Federal Reserve. Unable to contain its joy over its generous donation, the Bear Stearns board decided to merge with JPMorgan Chase (JPM). In a similar gesture of goodwill, the Federal Reserve Board of Governors reinstated the practice of dispensing donuts, this time from the PDCF, to managers of Bear Stearns and other investment banks. This practice, however, was again suspended a few months later when it was learned Lehman Brothers CEO Dick Fuld choked on one of the donuts.
CPFF Commercial Paper Funding Facility
REAL: The CPFF, Commercial Paper Funding Facility, purchases commercial paper (essentially debt or IOUs) from eligible issuers when they are unable to sell their paper on the open market.
HITSORY: Commercial paper, or CP, much like “Charmin” and “Angel Soft” [TP], is used to clean up messes in the financial world. Outfits like GE Finance, which is the largest issuer of commercial paper in the United States, sell CP to raise money that they then lend to businesses. Economists note the size of an institution’s issuance of CP is commensurate with its use of TP.
SPV Special Purpose Vehicle
REAL: The Federal Reserve does not have the legal authority to directly purchase commercial paper. The SPV, special purpose vehicle, is a Federal Reserve created mechanism (kind of like a company) that purchases commercial paper, thus allowing the Federal Reserve to indirectly purchase commercial paper without violating the law.
HISTORY: The Federal Reserve Act of 1913 Section 13(3) allows the Federal Reserve to basically do what ever it wants to preserve the financial system. No kidding! But, what few people know is that Section 13(3aa sub section 2) requires the Federal Reserve Board of Governors to drive really cool cars that are referred to as special purpose vehicles, since the board of governors is considered special. (Cars manufactured in Detroit are exempt from this provision, a directive known as the “Paulson” clause.)
MMIFF Money Market Investor Funding Facility
REAL: The Federal Reserve created the MMIFF to lend money to money market funds as a way to insure those assets -- U.S. dollars -- and protect investors.
HISTORY: The MMIFF Money Market Investor Funding Facility was created after the Reserve Primary Fund saw shares fall below one dollar. The Reserve Primary Fund is a money market fund that purchased large amounts of Lehman Brothers CP (commercial paper) and lost big when Lehman Brothers declared bankruptcy. Managers at the Reserve Primary Fund used much of their capital to purchase large amounts of TP upon learning of their Lehman losses. The MMIFF also uses SPVs (special purpose vehicles) to carry out the MMIFF’s objectives. The Federal Reserve Board of Governors did this because members felt it would sound impressive to have several acronyms with lots of letters utterly confuse everybody, and thus avoid the need for anyone at the Federal Reserve to answer questions about the MMIFF.
TALF Term Asset-Backed Lending Facility
REAL: The Federal Reserve created the TALF, Term Asset-Backed Securities Loan Facility, to lend money collateralized by student loans, auto loans, credit card loans and small businesses loans.
HISTORY: The TALF is open to a wider range of financial institutions than other Federal Reserve lending facilities. It is supposed to make it easier for these institutions to raise money that they can then lend to average Americans who need loans to pay for college and buy cars. The Federal Reserve felt it was necessary to be more aggressive with its lending facilities because banks continue to hoard money, despite the fact that all of the above-mentioned lending facilities were designed to do what the TALF is supposed to do. The Federal Reserve also created the TALF because it was afraid it would run out of letters in the alphabet to name future lending facilities after the U.S. Treasury announced it was selling rights to the English language to raise money for its own funding facilities, which promise to save the financial system through the use of nifty acronyms!
