Across the Curve

CP Rescue Musings

My money market interlocutor tells me that the Federal Reserve effort in the commercial paper market has restored a modicum of equanimity to that sector. But he says that the jury is still out on whether or not this is the solution to front end funding problems.In his view there are two areas in which the CP rescue is weak.

The Yankee banks are significant users of the commercial paper market and issue for size. In the glory days of the 1980s and 1990s when the system was awash in a sea of liquidity, many of these Yankee banks chose not to endure the legal and regulatory morass that issuance in the States required.

Therefore, many chose to repatriate there commercial paper issuance to the home country and fold it into to a global issuing network. That was a great idea at the time but does not work as well now as the Federal Reserve program requires that the issuer be domiciled here in the USA.

So that will shut out of the market about 50 percent of the issuers of CP. My trader friend suggested that possible European governments might consider a similar program.

The second problem is that the Federal Reserve facility only applies to the pristine A/1 P/1 borrower. It does not aid the lower quality A2/P2 borrower. These borrowers represent another 10 percent of issuers.

So the Federal Reserve is in the game but it will take the market some time to decipher the ultimate meanings of today’s radical actions.