The Evolution of the Current Crisis

2007

The Market for Commercial Paper Locks Up

Federal Reserve Bank of St. Louis Review, Nov/Dec 2009, 91(6), pp. 589-612:

"Since its inception in the early nineteenth century, the U.S. commercial paper market has grown to become a key source of short-term funding for major businesses, with issuance averaging over $100 billion per day. In the fall of 2008, the commercial paper market achieved national prominence when increasing market stress caused some to fear that, given its size and importance, the market’s failure would sharply worsen the recession. The Department of the Treasury and Federal Reserve enacted programs targeted at providing credit and liquidity to restore investor confidence."

Brian Bethune @ IHS Global Insight:

"The U.S. commercial paper (CP) market is a vital source of liquidity that supports a broad range of financial activity and transactions in the economy (see "Background on the Commercial Paper Market").

However, this key segment of the financial market encountered some major stresses in August and September; stresses that led to significant pressure on commercial paper borrowing spreads and a sharp decline in net issuance of an unprecedented velocity.

The ultimate source of the problem was in the U.S. housing market, where a protracted housing recession—the current housing recession is on track to be the worst since the early 1980s in terms of housing activity—combined with higher borrowing rates and downward pressure on housing prices precipitated significant upward pressure on mortgage delinquencies and foreclosures.

Associated downward pressure on mortgage backed securities' credit ratings and prices led to a significant flight to quality, and this contagion spread from mortgage-backed securities to engulf other major areas of the credit markets, including asset-backed commercial paper, jumbo mortgage loans, and less-than-AAA-rated corporate bonds...

A decline in commercial paper outstanding of this order of magnitude has not been seen since the Fed started publishing this data in early 2001. The shock to the markets from September 11, 2001 precipitated a drop of $61 billion in one week, but markets recovered thereafter. The crunch in CP credit markets in August and September was several times the order of magnitude of what we saw on September 11, 2001.

In order to put this decline in even better perspective, the peak- (May 9, 2001) to-trough (April 21, 2004) decline in combined CP and bank commercial and industrial credit during the last recession was $408 billion over close to three years. The decline in the same broad measure of total credit was $282 billion in August and September—clearly this decline is of recessionary proportions."

NYTimes 24 Aug 2007:

The size of the commercial paper market, a crucial source of short-term financing for businesses, decreased 4.2 percent last week, the biggest drop in at least seven years, as investors fled asset-backed debt and opted for the safety of Treasuries.

Short-term debt maturing in 270 days or less fell $90.2 billion to a seasonally adjusted $2.04 trillion in the week that ended yesterday, according to the Federal Reserve. Commercial paper outstanding has fallen by $181.3 billion, or more than 8 percent, in two weeks.

Rex Nutting @ MarketWatch Aug 30 2007 Commercial paper market still shrinking. Asset-backed securities fall 15.6% in past three weeks:

Outstanding commercial paper in the U.S. financial system dropped sharply for a third straight week, indicating that a severe credit crunch has not eased in the market that supplies most large companies with operating funds.

Outstanding paper fell by $62.8 billion, or 3.1%, in the week ending Wednesday to $1.98 trillion, bringing the total decline in the past three weeks to $244 billion, or 11%, the Federal Reserve reported Thursday.

The declines in outstanding paper have been felt strongest in the asset-backed portion of the market, which represents about half of all commercial paper. These securities are backed by assets such as credit-card receivables or mortgages. In the latest week, asset-backed paper fell by $59.4 billion, or 5.6%. In the past three weeks, this kind of paper has fallen by $184.9 billion, or 15.6%

CNN Money Sep 13 2007 - Why the credit crunch may deepen - With the $2 trillion commercial paper market locked up, it's harder for banks to lend money.

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2008 - commodity prices peak in unison, plunging the dagger into the heart
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2008
US EQUITY MARKETS COLLAPSE

MoneyZine 2008: Only time will tell the full story of the stock market crash of 2008, but on Monday October 6, the stock market would start a weeklong decline in which the Dow Jones Industrial Average would fall 1,874 points or 18.1%.

CNN Money - Sep 2008:

EW YORK (CNNMoney.com) -- Stocks skidded Monday, with the Dow slumping nearly 778 points, in the biggest single-day point loss ever, after the House rejected the government's $700 billion bank bailout plan.

The day's loss knocked out approximately $1.2 trillion in market value, the first post-$1 trillion day ever, according to a drop in the Dow Jones Wilshire 5000, the broadest measure of the stock market.

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2009 - tax-payer governments agree to take over losses/debt of financial intermediaries
2009 - equity markets recover
2010 - ratings agencies start to down=grade European sovereign debt
bond market vultures circle over Europe
2010 - equity markets continue to shine, midyear wobbles withstanding
- Arnold Schwarzenegger - the Governator - Presides over LaLa Land
- China starts to show signs of stress


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