Monday, October 6, 2008

Global credit markets grinding to a halt

International Herald Tribune
Sunday, October 5, 2008
A crucial source of financing for companies and banks is making some ominous grinding sounds. The market for commercial paper, which is high-quality, short-term debt, shrank by a record $95 billion last week, to $1.6 trillion, according to the U.S. Federal Reserve. That's down from nearly $2 trillion before the credit crunch.
Meanwhile, interest rates on this normally inexpensive debt are skyrocketing. Borrowers had to pay 4.5 percent to borrow for one month in the CP market late last week, up from 3 percent Tuesday. Also, the market is essentially closed to all but the very strongest borrowers, and even they can't borrow money for more than a couple of months.
That is a big problem for companies that need to refinance outstanding CP that is coming due - which happens often, since maturities in this market only range from overnight to 270 days.
Partly, the CP market's problems are caused by recent problems in the world of money market mutual funds. Investors pulled a lot of cash out of those funds in mid-September, after several revealed losses. Those funds are usually big buyers of CP, but they had to cut back on their purchases.
That problem diminished somewhat when the U.S. government announced an insurance program for money fund investors on Sept. 19.

The CP market's more recent woes have additional causes. First, investors' willingness to bear risk continues to decline throughout the financial markets. There is little interest in making loans to financial firms; the fall in their issuance of CP accounted for the bulk of the market's contraction. These borrowers are stuck on the sidelines until demand returns and interest rates fall.

But that may take time. Lenders have also been shunning corporate debt in favor of less risky government issues. And the U.S. Treasury has ramped up its sales of short-term debt. It recently issued $440 billion to finance the Federal Reserve's emergency lending programs. It may issue a lot more now that its $700 billion bank rescue plan has been approved by Congress.

All this government borrowing may be crowding out corporate borrowers. If so, the Treasury could find itself with an unpleasant paradox; its attempts to stabilize the debt markets may aggravate their problems. - Robert Cyran and Dwight Cass


John Thain is boldly going where few have trodden before him. The Merrill Lynch boss has agreed to stay on in a less senior role after his company's sale to Bank of America is complete. He will be running the combined company's global banking, securities and wealth management units. All told, that's a bigger business than just Merrill. But it's still a step down from the chief executive's office.

Often, big merger deals are used as cover for one or other chief to leave - or at least to semi-retire into a chairman-only or senior adviser role. Those few former head honchos who have in the past tolerated a drop in status mostly haven't done so for long, unless they had a promise of future glory. Back in 2004, Jamie Dimon, then chief of Bank One, retreated to the number two spot at JPMorgan Chase after the two banks merged - but he extracted a public commitment that he would be the boss within two years.

No doubt he had learned from John Mack's experience. While only Morgan Stanley's number two when it merged with Dean Witter just over a decade ago, Mack thought he had an ironclad deal with the latter's boss, Phil Purcell, to take the top spot within a couple of years. But the private agreement came to naught and Mack left in 2001, only returning after Purcell had been pushed out.

Of course, Thain and Ken Lewis, the chairman and chief executive of Bank of America, may have struck their own backroom accord - though at a relatively youthful 60, Lewis might not be in any hurry to step aside. It is also possible Thain feels that the opportunity to craft the next phase of the investment banking model within the Bank of America behemoth is sufficient compensation for no longer being the ultimate decision-maker.

Still, Thain won't be short of temptation should he hanker after another chief executive seat. The credit crisis is likely to open up more corner office jobs at rival companies, and it would be no surprise if Thain were on everyone's short lists. If the new Bank of America doesn't end up satisfying him, Thain may disappear at warp speed. - Antony Currie

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