Sep. 18, 2007: 43 days to Halloween! And a quick briefing on commercial paper

Sep. 18, 2007: 43 days to Halloween! And a quick briefing on commercial paper Rob Chrisman

I once worked with an individual who plugged her power strip back into itself and then couldn’t understand why her system would not turn on.

Are lenders anxious to get back to offering “NINJA” loans? This, of course, stands for no income, job or assets, somewhat of a joke but nonetheless they crept into the market. Defaults on Ninja loans have become common and some sub-prime lenders have been driven to bankruptcy as a result. Why is this a problem for homeowners in other countries? The sub-prime difficulties are affecting the global financial system, North Rock in England being the latest large example, because these Ninja loans do not just sit on US banks’ books. They are sliced up, repackaged and sold on to hedge funds, pension funds and other investors around the world. Recent polls show that 70% of the country does not want to bailout the homeowners, the lenders, or the funds that bought pools backed by these loans.

There are some that hope that the Fed will cut the funds rate target by 50 basis points today along with a 75bp cut in the Discount Rate (the rate that the Fed charges banks to borrow).  But they are in the minority, with the majority feeling that a 25 basis point ease is in the cards. Analysts are weighing a stable economy, decent current rates, the desire for the Fed to not look too reactionary, a weak labor market,  a weak housing market, and today’s low Producer Price Index number (-1.4%, the core rate +.2%, year-over-year +2.2%). Look for the announcement at 11:15AM PST, 2:15PM EST.

There is always the chance that the Fed will lower Fed Funds by .25% and also lower the Discount Rate by .50%. In other news today, oil is over $81 per barrel, which is certainly inflationary. And lastly, Lehman Brothers (parent of Aurora) released their earnings this morning: stronger than expected. The yield on the 10-yr stands at 4.47%.

But the fact remains that the $2 trillion market for commercial paper remains frozen, suggesting there could be more pain ahead for borrowers around the world. Commercial paper drying up, a form of debt that financial institutions and companies rely on to raise money for short periods, is likely to keep pushing credit spreads wider and, in turn, pressure borrowers since investors are preferring Treasury securities. It doesn’t help that commercial paper is maturing on a near-constant basis: most commercial paper matures within 30 to 40 days, but investors have been willing to renew only for shorter terms like one day or one week, analysts said, and at yields as high as 6.27%, up from 5.32% at the end of July. Banks are stuck with more long-term assets than they can finance, and on top of that banks are also dealing with consumers and companies already facing higher borrowing costs. If the credit crunch persists, consumer spending and corporate profits could be crimped. That scenario would be dire for economic growth.