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