October 8, 2008
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.