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Five Things You Need to Know: Commercial Paper Market; Increased Borrowing Costs; Junk in the Trunk; Housing Slump Affecting Economic Growth, Mortgage Brokers, Johns; Point/Counterpoint: The Fed Should Cut Rates by 100 Basis Points


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Minyanville Presents Finance Inaction: The Commercial Paper Market

Bankers in London are warning of the worst crisis in global money markets in 20 years as more than $110 billion worth of Commercial Paper is set to mature this week, according to the London Times.

  • Remember from last Thursday's discussion of Commercial Paper (CP), that CP is short-term debt maturing in 270 days or less, used by corporations primarily to finance inventory or manage working capital.
  • Almost 20% of the short-term money market loans issued by European banks are due to mature between September 11 and September 19.
  • The inability of much of this paper to mature and be resold will force the world's major banks to assume the liabilities onto their balance sheets, the Times says.
  • That has the net effect of removing from availablity cash that banks would have used to make loans.
  • Why is this happening?
  • According to the Times, many of the off-balance-sheet structured investment vehicles (SIVs) set up by the banks were borrowed in the form of asset-backed commercial paper (ABCP).
  • And this accounts for a large portion, almost half, of the CP rollovers.
  • ABCP is a form of senior secured, short-term, low-cost borrowing available to companies that could not otherwise directly borrow in the commercial paper markets.
  • Also, see this link for a backgrounder from NYU on ABCP.
  • The bottom line is that the banks are now hoarding cash and have stopped lending to each other.
  • This has created a liquidity freeze.
  • Or, as Paul Mortimer-Lee, global head of market economics at BNP Paribas in London put it for the Times, "It is both a liquidity and a capital crisis."

2. Finance Inaction, Part Two: Increased Borrowing Costs Leads to Less Borrowing

Closer to home, Citigroup (C), Goldman Sachs (GS), Lehman Brothers (LEH), Merrill Lynch (MER) and Morgan Stanley (MS) are together paying out $65 million extra in lending charges on $9 billion worth of bonds issued since July, according to the Financial Times.

  • On top of the increasing costs in the bond markets, the banks are having to pay millions in extra charges to borrow in the shorter term money markets, where interbank rates have risen sharply since July, the FT noted.
  • Moreover, leveraged loans, stuck on bank balance sheets as buy-out deals have been delayed and are also threatening to take a bite out of profits.
  • According to data from Dealogic, worldwide 25 banks are together paying out an estimated $300 million extra in lending charges on $70 billion worth of bonds issued since July.
  • Relating this back to today's Number One, this segment of Finance Inaction is all part of the continuing standoff between the major banks worldwide.
  • Like the U.S. Federal Reserve, they are all waiting to see which dead bodies float to the surface in financial results that are reported next week.

    Reporting Dates for Major Brokers:
    : October 19
    Goldman Sachs: September 20
    Lehman Brothers: September 18
    Merrill Lynch: October 17
    Morgan Stanley: September 19

3. Finance Inaction, Part Three: Junk in the Trunk

Junk-bond issuance has plummeted to near all-time lows, totaling $4.3 billion in July and $2.4 billion in August, according to the Wall Street Journal.

  • The near record-low for junk issuance in August compares with $23 billion in May, the busiest month so far this year.
  • Meanwhile, issuance of investment-grade corporate bonds in the U.S. soared past $70 billion in August, up from $24 billion in July, the biggest August on record, according to IFR Markets and Thomson Financial.
  • In many ways this is the corporate reflection of what is happening in America between the Haves and Have Nots.
  • Corporate Haves are finding that longer-term debt access is still widely available, if slightly more expensive, while the Have Nots are being forced to find more creative ways to raise necessary capital.

4. Housing Slump Affecting, Economic Growth, Mortgage Brokers, Johns

It's a situation that is becoming all too familiar to "Real Estate Johns." CBS News reports that New Rochelle, NY Police raided a three-bedroom home on Friday night arresting four alleged prostitutes and the homeowners in what is being described as a suburban brothel.

Charged with promoting prostitution were Richard Werner and Heather Mezzenga, both mortgage brokers who moved out of the house roughly two years ago so they could begin renovating another home.

Before opening the brothel the two mortgage brokers tried to sell the house, listing it for $750,000, but found no offers at that price. Even after the asking prices was slashed by 20% the couple found no takers. Faced with a high cost of carry on the property, the couple allegedly did what any desperate homeowner would do; they turned it into a brothel.

Indeed, there are increasing signs that this worsening housing slump is beginning to spill over into other areas of economy; namely, prostitution. Real estate "shoppers" report finding fewer and fewer "open houses." Meanwhile, "Realtors" are noting that what few "buyers" they are "showing houses" to are "bidding" less for the "property."

Of course, this is nothing new to those "in the game." Pimps have long claimed that the business "ain't easy," and now, as dark days spread deeper throughout the Real Estate industry, it turns out neither is "selling houses."

5. Point/Counterpoint

The Fed Should Cut Interest Rates by 100 Basis Points

By Steve Forbes, Billionaire

I believe the U.S. Federal Reserve should cut their key interest rate, now at 5.25 percent, by 100 basis points when it meets Sept. 18 to solve this ongoing liquidity crisis.

However, the Fed should make it clear that while they're going to solve the short-term crisis, they will, over the next year or so, start to mop up the excess liquidity.

The Fed Should Give Me a Sandwich

By Jerry, Homeless

Although Mr. Forbes makes a valid point about the importance of solving the ongoing global liquidity crisis, I am in a slightly different camp. I believe removing excess liquidity from the system - the Federal Reserve selling bonds from its portfolio and withdrawing funds from the market - is tightening which the Fed has never fully done.

As a result, I respectfully disagree with Mr. Forbes' appeal for a 100 basis point cut in the Fed Funds target rate, and would instead lean more toward a sandwich.

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