> > If I read
> > correctly, and I multi-sourced this, there was a short period that
> companies
> > couldn't sell short term paper; in other words companies with big assets
> > couldn't get loans for a day or two that were a fraction of their
> assets.
>
> Not all companies...mainly the companies that had questionable balance
> sheets.
I don't have direct access to the WSJ on-line because I'm cheap. But,
here's a site that quotes them....note the companies involved:
http://weblog.blogads.com/1565/credit-crunch-from-wall-street-to-main-street
<quote>
In the giant market for commercial paper, a reliable source of low-cost,
short-term funds in normal times, the cost of borrowing shot up Wednesday.
Traders said most lenders were unwilling to extend credit beyond a single
day.Sears Holdings said it paid 3.6% Wednesday, about three-tenths of a
point more than a day before, to sell $3 million in 30-day commercial paper.
Ford Motor Credit Co., the finance arm of Ford Motor Co., paid 7.5% for
overnight borrowings, according to one trader, who said the rate would
typically be several percentage points lower. General Electric Co., rated
one of the safest borrowers, paid 3.5% for overnight borrowing, about 1.5
percentage points more than would have been normal, this trader said.
<end quote>
Given this, a panic started Thursday....that's when the Fed's announced the
bailout.
Now, you can argue that Sears and Ford are questionable, but GE? The point
is that the liquidity of the market was drying up. And, at
http://meganmcardle.theatlantic.com/
we see some of the consequences of a loss of liquidity,
a short quote on this:
<quote>
Or take capital requirements. I'm in favor of higher ones. But a high
capital requirement, perversely, hurts companies in a downturn. This sounds
bizarre. But say you have a broker-dealer that is only allowed to leverage
itself 5 to 1--a very, very safe capital ratio. (12-to-1 is, IIRC, about
standard).
Now say that the bank suffers a major setback, like a bunch of totally
illiquid mortgage backed security whose nominal value has dropped to near
zero. Having a lot of capital protects the creditors in bankruptcy, who now
get 20 cents on the dollar instead of six. But the firm still goes into
bankruptcy, because they can't dip into their other capital to make good the
debts. Indeed, the higher their capital requirements, the more they have to
deleverage in a crisis, because they need to unwind more positions to shore
up the bad ones they can't sell. That deleveraging dries up capital in
other markets, decreases the value of whatever securities they're dumping,
and thus threatens other institutions.
<end quote>
Or, just take how I'm affected. If Fanny and Freddie went under, the place
where roughly half of the mortgages end up is gone. So, it's much harder to
find a mortgage, which drives prices down, which means more houses are under
water and now bad debt, etc.
The natural tendency of business (which we saw as the short term liquidity
started to dry up on Wednesday) is to hunker down during bad times. That's
why even GE had trouble selling short term debt on Wednesday.
Finally, one part of the first quote struck me as critical:
" Traders said most lenders were unwilling to extend credit beyond a single
day."
That looks like the start of a panic to me. I'm not sure what you'd call
it.
Dan M.
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