Lehman Brothers filed for bankruptcy, intensifying stress across credit markets. A key concern was that many large companies depend on commercial paper (short-term IOUs) to cover payrolls and day-to-day expenses, and investors suddenly became far less willing to lend.
The Reserve Primary Fund, a major money market mutual fund, marked down its Lehman holdings and its share price fell below $1 ("broke the buck"). This event helped trigger heavy redemptions from prime money funds, cutting off an important buyer base for commercial paper.
To help money market funds meet withdrawals, the Federal Reserve created the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). The facility made loans to banks so they could buy high-quality asset-backed commercial paper from money funds, supporting liquidity and reducing forced selling.
The Federal Reserve Board authorized the Commercial Paper Funding Facility (CPFF) under Section 13(3) emergency authority. The goal was to serve as a backstop buyer so creditworthy issuers could still roll over maturing commercial paper during the market freeze.
The Fed released operating details for CPFF, including eligible paper (highly rated, U.S. dollar, three-month maturities) and the planned start date. It announced that CPFF would begin funding purchases on October 27, 2008.
CPFF began purchasing commercial paper on October 27, 2008. It operated through a special-purpose vehicle (CPFF LLC) financed by the Federal Reserve Bank of New York, allowing the Fed to lend against the commercial paper it purchased while issuers paid fees for access.
CPFF usage surged as issuers relied on the backstop to refinance maturing paper. At its peak around year-end 2008, CPFF had roughly $350 billion outstanding, reflecting how deeply normal market funding had been disrupted.
As funding conditions remained fragile, the Federal Reserve extended CPFF’s authorization so it could keep purchasing commercial paper beyond the original end date. This extension aimed to prevent a new freeze as large volumes of short-term debt continued to mature.
As stress in funding markets eased, the program’s pricing and terms were adjusted to better match the changing environment while keeping a backstop in place. These changes supported a gradual return from reliance on the facility toward private-market funding.
CPFF’s authority to purchase new commercial paper ended as the market functioned more normally and private buyers returned. Even after purchases stopped, the facility continued to exist so previously purchased paper could mature in an orderly way.
The Federal Reserve closed CPFF after its emergency role had largely ended. Official summaries later reported that the program incurred no losses and generated earnings for the Federal Reserve Bank of New York.
In response to the crisis, Congress passed the Dodd-Frank Act, which amended the Federal Reserve Act and added new transparency and limits for emergency lending under Section 13(3). These changes aimed to shape how future crisis facilities—like CPFF-style programs—could be designed and disclosed.
Commercial Paper Funding Facility (CPFF) and the commercial paper market freeze (October 2008–2009)