The Corner

More on Commercial Paper

Here is a good explanation of what is going on.

Commercial paper is sold by major corporations and most of the nation’s leading financial institutions. They use the proceeds to fund day-to-day business operations. It is bought primarily by money market fund managers and other institutional investors.

“It’s basically the checking accounting for business,” said Kevin Giddis, head of fixed-income sales trading and research for investment firm Morgan Keegan. “It is literally how they operate on a day-to-day cash basis. It’s their main funding source.”

Before the current credit crisis, there was nearly $2 trillion of commercial paper outstanding and was mostly issued for short terms – never more than nine months – and thus had to be renewed frequently.

For investors, it was considered a very safe investment to purchase and one that could be easily resold.

But since the bankruptcy of Lehman on Sept. 15, many leading buyers of commercial paper have been afraid to play in the market, shifting their investments to safer U.S. Treasurys instead. No one wanted to get caught holding commercial paper for a company or financial institution that suddenly found itself in trouble….

Federal Reserve officials said that the overwhelming majority of the paper outstanding is coming up for renewal in the next several days and companies needing to use the money could face trouble when they try to renew it.


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