Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



How Commercial Paper Got Sucked Into This Mess

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Another day, another bailout. Yawn.

The Federal Reserve announced it would start buying commercial paper -- short-term debt used by corporations to pay for day-to-day operations like payroll and overhead -- as yet another debt market wobbles on the brink of extinction.

This time, it's different
For once, you'll be hard-pressed to find the words "Wall Street" associated with this bailout. Commercial paper can be issued by a whole slew of innocent businesses -- the Procter & Gambles (NYSE: PG  ) and Coca-Colas (NYSE: KO  ) of the world. Companies that may have never heard of credit default swaps or ever touched a collateralized debt obligation are now feeling the wrath of the credit crisis.

Commercial paper ... subprime ... I'm not seeing the connection
What's apparent with the commercial-paper bailout is that this credit crunch no longer has boundaries; it's spreading like wildfire. But how? How has the credit crunch -- which started with a subprime snafu more than a year ago -- found its way into commercial paper? I have no idea what crazy thoughts are flowing through the bond market's head, but I have one idea as to why the problem is spreading like the flu:

  • Real estate values plunged.
  • That, in turn, caused companies such as Lehman Brothers -- which used to issue commercial paper -- to fail.
  • Those failures caused money market funds such as Reserve Primary to "break the buck."
  • Other money market funds, scared out of their socks over the prospect of falling victim to seemingly safe commercial paper, won't touch anything short of Treasury bills.
  • Commercial paper gets no love, and the market dries up.

What's important about the commercial-paper bailout is how evident it is that the root of the problem -- falling real estate values -- has become contagious. Chalk that up as another reason why the $700 billion plan had to be implemented. This problem isn't contained to the likes of Bank of America (NYSE: BAC  ) and Goldman Sachs (NYSE: GS  ) . It's everyone's problem now, whether you helped cause it or not.

What a mess.

Related Foolishness:

Fool contributor Morgan Housel owns shares in Procter & Gamble. Bank of America is a Motley Fool Income Investor recommendation. Coke is a Motley Fool Inside Value selection. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 747982, ~/Articles/ArticleHandler.aspx, 10/28/2016 4:00:12 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,166.74 -2.94 -0.02%
S&P 500 2,127.00 -6.04 -0.28%
NASD 5,191.32 -24.66 -0.47%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/28/2016 3:44 PM
BAC $16.68 Down -0.23 -1.36%
Bank of America CAPS Rating: ****
GS $176.91 Down -0.84 -0.47%
Goldman Sachs CAPS Rating: ***
KO $42.20 Up +0.08 +0.18%
Coca-Cola CAPS Rating: ****
PG $86.80 Up +0.22 +0.25%
Procter and Gamble CAPS Rating: ****