Reply #33: Mike Whitney: Commercial Paper - what you don't know [View All]

COMMERCIAL PAPER: WHAT YOU DON’T KNOW CAN HURT YOU

Commercial paper is something that is rarely understood outside of the investor class. It is, however, a critical factor in keeping the markets operating smoothly. “Commercial paper is highly-rated short-term notes that offer investors a safe haven investment with a yield slightly above certificates of deposit or government debt. Banks use the money to purchase longer-term investments such as corporate receivables, auto loans credit card debt, or mortgagees.” (Wall Street Journal 9-5-07)

Commercial paper has been vanishing at an alarming rate in the last month. $240 billion has been drained in just the last 3 weeks. (There is $2.2 trillion of commercial paper in circulation in the US) Because CP is “short term”, hundreds of billions of dollars need to roll over (be refinanced) regularly. CP is at the very heart of the credit crisis which has spread through the financial markets and it could result in a massive catastrophe. The large investment banks are in a panic---and that is probably an understatement.
http://www.informationclearinghouse.info/article18360.htm


Consider this article in the UK Telegraph which provides an eye-popping summary of what is going on behind the scenes.

Banks face 10-day debt timebomb

Fears of this impending call on bank credit lines are the true reason that lending between banks has ground to a halt, according to senior money market sources.

Banks have been stockpiling cash in preparation for this "double rollover" week, which sees quarterly loans expire alongside shorter term debts - exacerbating a problem that lies at the heart of the credit crisis.

"Banks are hoarding cash," said David Brickman, the head of European credit strategy at Lehman Brothers. "We think the reason for that is the commercial paper markets. There was $100bn of commercial paper issued by European institutions that was scheduled to roll over in August, much of which struggled to do so.

more...
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/09/cndebt109.xml




Edit to add: interesting comments to read attached to Mike Whitney's column.