Even Top Corporates Having Trouble Raising Short-Term Funding

The Times Online tells us that even blue chip companies are having trouble raising money in the commercial paper market. By way of background, commercial paper is an unsecured short term debt (there is another version, asset backed commercial paper, but that’s not the one under discussion right now) that companies and financial firms use on a day to day basis. CP can be as long in maturity as 270 days, but the bulk of the new paper sold is in the 30 to 90 day range.

From the Times:

The paralysis in money markets is feeding through into the wider economy, with blue-chip nonfinancial companies suddenly finding it impossible to borrow short-term, or only at penal rates.

Industrial and commercial companies outside the financial sector have been caught out by the sudden drying-up of investor appetite for commercial paper (CP), the standard way for large companies to borrow for a few days to a few months. Martin O’Donovan, assistant director at the Association of Corporate Treasurers, said that the change in sentiment over the past few days was extraordinary. “Corporate treasurers are surprised by what has been going on since the Lehman collapse. The nervousness about financials has to some extent spilled over into ordinary corporates,” he said.

Demand from investors for blue-chip CP maturing in one to three months had in most cases dried up, Mr O’Donovan said. Corporates were suddenly unable to borrow in the CP market for more than a few days at most. Instead, they were having to call on much more expensive bank borrowing facilities. Given the blowout in Libor, the benchmark for pricing all kinds of loans, blue-chip companies were typically paying a full percentage point more on short-term debt than they were a month ago, Mr O’Donovan said.

Now although this all sounds dramatic, is unambiguously not good, and probably has corporate treasurers plenty anxious, consider:

1. There is no indication that companies are facing a cash shortfall due to the inability to borrow, but that they have had to scramble and pay more and that is disconcerting

2. Even at one percentage point more than last year, short term money is still not very expensive.

I am NOT saying we can go very long with a seized up commercial paper market. The dislocations will grow. These worries about funding probably are leading companies to hold off on discretionary spending. That alone has ramifications.

However, I am beginning to wonder if the markets have gotten into an accidental game of chicken.

Why borrow and lend to your fellow banks if you can get plenty of cheap funding from your friendly central bank? As FT Alphaville said earlier today:

Liquidity is being thrown at the system, but it’s just making things worse.

By pumping in more money central banks aren’t addressing the fundamental concerns of the banks at all. Going cold turkey is a very unpleasant thing, but the solution isn’t more drugs, even if they alleviate short term pain.

In assuming they can rely on central bank money market operations – which will be expanded (as is the case) when the going gets tough – banks are naturally avoiding lending to each other.

Now consider the bailout version of this problem. Yes, the market for bad bank assets wasn’t so hot, but the big reason is not lack of buyers, but unwillingness of banks to accept the lousy realistic prices on offer.

But the government is now moving towards a plan to buy that paper for something closer, maybe a heck of a lot closer, to your price. You now have no incentive to try to unload those assets, so what little trading there was in them has probably gone into a deep freeze.

Even though Mr. Market will win in the long run, I would not bet against banks getting some form of bill passed by Tuesday. To paraphrase James Carville , if you are the bond market, you can intimidate everybody.

Update: Some of the comments lead me to believe I was not as clear as I should have been. I don’t know whether it was being distracted by the debates or having spent so much time on the credit crisis that I am starting to jump over things in my missives.

The CP market not functioning is a big deal. What is surprising is that it is continuing not to function. The big buyers of CP are money market funds (corporate treasurers are also major players). The backstop to the money market funds last week should have taken care of this problem. Clearly it hasn’t.

I am wondering whether this is a communication problem (investors appear to be withdrawing cash from funds and going into Treasuries) or substantive. The program is voluntary, and therefore an investor would have no way of knowing whether his fund was participating unless it announced it had done so or the investor went to the trouble of inquiring. The September 21 announcement promised further details in “coming days” but I see no further press releases. Thus it is not clear that the program is effective yet.

But the money market woes are worsening the general banking woes, as CP issuers are going to their backup lines of credit, which makes demands on banks when they are leery of lending. Thus the apparent worsening of the liquidity crunch may appear to be due to the failure of the bailout bill to pass, but a significant contributor may be lack of clarity on the money fund front.

Any comments appreciated.

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  1. SlimCarlos

    If the junk started trading at true market prices, marking portfolios accordingly, well, wouldn’t the solvency issue get writ large? This would seem to be disincentive enough, wouldn’t it?

    And wouldn’t this be the case whether a bailout was pending or not?

  2. Anonymous

    Are we discussing two different things? The real problem assets that banks hold are toxic waste like CDO^2 . The price of commercial paper or other short term lending has ticked up a bit, but it’s just a side issue and the increase is not catastrophic.

    Unfortunately for the banks they really stuck with their CDO^2 type stuff. It hasn’t traded in a year or so and they want to get rid of it.

    I say, don’t take it off their hands! Otherwise it is on my hands, and I sure as heck don’t know what to do with it either. Instead let them BUY capital with their stock, so that overall their books are sound.

    The toxic waste remains their problem. They aren’t happy but so what? They can’t scream the sky is falling, and that’s as far as I care.

  3. Anonymous

    On second thought, maybe I do end up caring, but only because for some of these banks, they will have to give me (the government) so much stock to buy the needed capital, that I’ll end up owning the whole bank, including its toxic waste.

    But at least I get something substantial and sure, as it should be. These days the government should be driving a very hard bargain with the banks, as we did with AIG.

  4. Dave Raithel

    On the theory that different people look at different posts, I’ll put this here (apologies to those who were already bothered by it on “On the Level of Thought and Care …” post.


    Is worth a listen – about how commercial paper keeps companies like Servicemaster (Terminix) functioning from day to day, and how mutual funds breaking the buck seized up commercial paper – you professionals already know this stuff, I put it here for the rest of us trolls…

  5. Mike M

    You would think Bernake or a fed/treasury insider had to run some game theory analysis on corporate/public reaction once the plan was tossed out there and come up with this deeper freeze as a unintended or intended consequence. Once credit markets really froze the issue would no longer be about bailing out wall street, instead attention would be focused on protecting main street, then the bailout and all its vagueness would be a slamdunk.

    I find it hard not to believe this wasn’t heavily analyzed before the plan was tossed to congress.

  6. alan von altendorf

    I can’t go to NPR without feeling insulted, so I’ll pass. Let’s agree that tradable commercial paper is another way of rewarding profitable, creditworthy companies and punishing losers. If funding dries up, Google will do alright. GE won’t. Tells us something about creditworthiness and cash flow. But cheap unsecured IOUs are the least important source of corporate finance. Paid in capital, bonds, debentures, and retained earnings matter more or less in reverse order. No profits, no retained earnings, no coupon payouts, etc. CP is a flyspeck on a healthy balance sheet.

  7. dlr

    I have checked at the Fidelity web site several times (they are my broker) and they have absolutely no information of any kind posted about the government insurance on their money market funds. Instead they have an analysis showing how much their various money market funds are exposed to Lehman’s, and AIG. Nothing at all as of this posting on how much exposure they’ve got to banks like Wachovia or Washington Mutual. I wouldn’t keep a penny in their money market funds if I had any choice in the matter at all. But the scumbags require that you transfer your money into their “core” money market fund any time you want to place a trade. Which is why I am moving my account from Fidelity even as we speak.

  8. Yves Smith


    I know you’ve made up your mind, so this is a matter of curiousity. Doesn’t Fidelity have a government money market fund? Since trades are t+3, you’d still be able to transfer cash into the “core” fund before settlement. A nuisance, however, and still some residual risk.

  9. Harmoniker


    Switch to Schwab. When you transfer funds into your brokerage account, it stays in an FDIC-insured bank until you invest it elsewhere.

    Schwab does have a good selection of 4-week and longer Treasury Bills you can purchase from them at no commission. Plus they offer a range of AAA corporates and municipals, as well as CDs.

  10. Anonymous

    Money market funds have some competition from tax exempt money market funds right now. Yields on tax exempt are going north of 4% while taxable money market remain around 2%. This is an anomaly that the financial media has ignore so far. Yield hunters are switching from taxable to tax exempt money market funds right now.

  11. curious

    dir, just FYI… at Vanguard you choose which MMF you want all your trades to work to/from, and a Treasury-only MMFs is an option. (Is Fidelity not similar?)

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