The US Federal Reserve yesterday moved to prop up corporate America in the face of the financial crisis by offering to buy debt directly from companies.

In a move designed to ease company funding difficulties that have spilt over from the banking turmoil, America’s central bank unveiled plans to rescue the $700 billion (£400 billion) market for short-term company debt by offering to acquire so-called commercial paper typically used to fund businesses’ day-to-day operations.

The Fed said that it would buy three-month, unsecured commercial paper directly from the companies that issue the debt so that corporate America can continue to borrow funds. Those funds are the lifeblood of American corporations, which use the money to pay salaries and meet other basic operating costs.

The rescue package comes only a week after the US Treasury was given clearance to bail out the world banking system at a cost to the American taxpayer of $700 billion.

In the past week, the commercial paper market in the United States has frozen because banks, money market funds and other institutions have been reluctant to buy the debt, preferring to hoard cash.

Wall Street experts have blamed Henry Paulson, the US Treasury Secretary, and Ben Bernanke, Chairman of the Fed, for failing to anticipate the collapse of the commercial paper market, which shrank by 10 per cent - or about $95 billion - in a week. According to official statistics issued by the Fed, the US commercial-paper market contracted in the week to October 1 by a record $94.9 billion, to $1.61 trillion in outstanding debt, after a $61 billion decline the week before.

As the market began to freeze up, American companies, desperate to borrow short-term funds, were forced to use standby credit lines.

Chris Whalen, of Institutional Risk Analytics, the Wall Street consultancy, said: “Bernanke and Paulson apparently didn’t understand the consequences of allowing Lehman Brothers to fail. Lehman was the No 1 dealer in commercial paper. They were the prime market. The problem with commercial paper is that it isn’t a high-margin business, it’s a loss leader, but they dealt in it because it helped them to forge very valuable client relationships. Commercial paper is needed to finance real things by some of the biggest companies in the world.”

In a statement, the Fed said: “The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities.”

It added: “By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market.”

Although terms of the commercial paper bailout are unclear, it is a rare foray by the Fed into unsecured lending. In the past, when the Fed has lent money to banks, the loans were backed by collateral. However, in this case, the Fed will charge fees, to be paid by the issuers. The Treasury will make a deposit at the Federal Reserve Bank of New York to support this facility.

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