Commercial Paper (Max Fraad Wolff)

by Dollars and Sense

A primer on commercial paper by the wonderful Max Fraad Wolff, special to the D&S website:

Financialization's (Latest) Weak Link

There may be no better illustration of the staggering pain emanating from financial market turbulence than the carnage experienced recently in commercial paper markets worldwide. Commercial paper (often abbreviated as "CP" in the financial press) is not a synonym for trade journals or advertising-heavy publications of little intellectual value. "Commercial paper" is the term used for short-term loans—for less than 35 weeks— that are made without needing (in the United States) to be registered at the Securities and Exchange Commission (SEC). Companies raise money by selling repayment promises—IOUs—below the full value at the time of repayment. The difference between the price received by firms in the commercial paper market and the amount they pledge to pay is referred to as the "discount." You may find large household name firms selling $1000 repayments in 90 days for between $960 and $980 today. A few months ago, firms were selling $1000 in 90 days for $990 or more. The discount has risen, as money has become hard to get. Most loans are for far less than 270 days, and loans average around one month's duration. Trusted firms with good credit ratings can borrow—nearly at will—for low cost when markets function well. So commercial paper markets allow corporations fast and easy access to cash for operations, near-term expenses, and even payrolls. Consequently, commercial paper markets grew to a size of about $2 trillion, and this market became essential to the basic functioning of many firms—and hence to the whole economy.

Read the rest of the article.

Labels: credit crisis, financial crisis, Max Fraad Wolff, SEC

 

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10/29/2008 03:04:00 PM