One Bright Spot in the Bailout--Commerical Paper

The Fed's program to help commercial funds has worked well. Worried about the Reserve Primary Fund's "busting the buck," the Fed offered to guarantee price levels in money market funds and buy from such funds illiquid assets (ABSs).  The effect has been dramatic; the program has re-invigorated money market funds and the funds are buying commercial paper and short term asset backed securities (ABSs), both of which support operating businesses.  The Fed charges fees for the guarantees and, so far, has not had to make any payments. This site has long favored supporting the commerical paper market. The money market funds hold very high quality short term paper, easy to value and standardized to make it fungible -- the opposite of the mortgage backed securities (MBSs) that are held by our large financial institutions.  I continue to believe that the only way to handle the large banks that hold MBSs is to put the worse ones through insolency proceedings. An important byproduct of the proceedings will, of course, feature bids by vulture funds for the banks MBS portofolio that will help re-establish a market price for these otherwise impossible to value securities.