Pimco chief investment officer Bill Gross advocated the Fed take drastic action in his October investor outlook statement, opining that the financial crisis “requires a systemic solution, which moves beyond cyclical interest rate cuts, liquidity provisions, or even the purchase of subprime mortgage-backed bonds. We believe the Federal Reserve must now act as a clearing house, guaranteeing that institutional transactions clear…and take another bold step: outright purchases of commercial paper.”
Meanwhile, the New York Fed has been authorised to borrow up to $37.8 billion in investment-grade securities from struggling insurance company American International Group (AIG) in return for cash collateral.
The cash injection comes a little over three weeks after a much publicised $85 billion loan facility was extended to AIG by the Fed in exchange for a 79.9% equity stake in the firm. The regulator confirmed that “as expected”, AIG has spent the $85 billion loan settling transactions with counterparties and required additional funding to “replenish liquidity”.
Despite the actions following on the heels of coordinated base interest rate cuts by six central banks on Wednesday, financial markets continued to tank, taking no comfort from the unprecedented measures.
The Dow Jones Industrial Average plummeted 678 points to close trading in New York at 8,579.19 points – the first time the index has fallen through the 9,000 point barrier in five years. The Ted spread, which tracks the difference between three-month Libor and US Treasury bills, widened further to close at 4.23%, reflecting mounting counterparty credit risk anxiety.
Elsewhere, the Chicago Board Options Exchange’s Vix, which measures the implied volatility of S&P 500 index options for the next 30 days, also broke new ground climbing to 63.92%.
See also: Ted spread continues to climb
"Fear index" hits high as Ted spread breaks 4%
Federal Reserve to buy commercial paper from US banks
Fed to lend additional $37.8 billion to AIG
In a brief statement, the New York Fed acknowledged it is in discussions with Pimco “regarding asset management services in support of the CPFF”, a facility that will empower the Fed to purchase asset-backed and non-secured commercial paper from approved issuers – both financial institutions and other eligible corporates.