The Commercial Paper Crunch
Midmorning Cocktails and A View From The Buyside

Cucumber-Martini-225b.jpgI light up another cigarette. The sky is brilliant blue. The weather man had promised humidity leading to rain tonight. But it’s not yet noon on a late August morning, and the air is almost crisp. A slight breeze blows the smoke over my right shoulder and toward the Hudson river.
Somewhere beyond the far shore of the Hudson there are thousands of homes bought with mortgages that everyone now calls subprime and many view with terror. The phrase “subprime slime” is used but I can never tell whether it refers to the mortgages, the way they corrode other credit products, the people who bought houses with them, the people who lent them out or the folks who bought structured credit products containing them or the folks who built and sold those products.
I’m on the rooftop of a Tribeca building. The apartment just below me is owned by a money-manager who has asked me not to describe his employer too closely. I’m not even supposed to reveal whether it’s an investment bank, a hedge fund, a money manger, a mutual fund, a pension fund or something else entirely. He’s in the credit business, managing a portfolio of credit products bought with money his employer is charged with managing. I’m here because he’s promised to talk to me about commercial paper.
“It’s Hendricks, so you don’t need any vermouth,” he says. He places a martini glass in front of me. The liquid is so clear that the light barely breaks as it passes through it. A pale green slice of cucumber floats atop, clinging to the edge of the glass. “It’s summer,” he says to explain the cucumber.

It feels very early in the day for martinis. Even martinis made with cucumbers. But he’s on vacation this week. Later today he is heading out to the eastern end of Long Island to join his wife and child. (I’m not even supposed to reveal the sex of his child. His paranoia about talking to the press runs that deep.) This was the only time we could meet in private.
The past tense is out of use with the credit trader. As is the future tense. He speaks only in the present tense. For example: “I’m sure you’re eager to hear what Bernanke has to say tomorrow,” I say to get the conversation about credit started. “He’s fishing right now,” he says. “Your correspondent is doing exactly the right thing fishing instead of buzzing around Jackson Hole hotel hallways.”
(I’ve added that hyperlink. Quite obviously, he doesn’t speak in hyperlinks.)
It’s only after he pours a second round of martinis that he starts talking about commercial paper.
“I’m not buying any,” he says. “I buy this stuff to fill out the portfolio. It’s short, short term. It’s got the highest yield for a money market type deal. No real interest rate risk. You almost don’t have to think about it. But now you do. You need to drill down into what’s under the paper. Is it subprime? Is it marketable if I’m selling it off? Frankly, I’m not sure it’s worth the effort. And people are pissed that they weren’t warned about it before. They’re pissed at the products people who are selling this stuff. It’s a buyer’s strike.”
I ask him about the article in this morning’s Wall Street Journal about bank conduits that spin-off commercial paper and special investment vehicles run by private equity firms. He’s read it. He says it’s the most important thing you can read today.
“The banks are swimming in conflicts over these conduits. They get fees for building them. They’re on the hook if they can’t sell the paper. Now we know you can’t trust them about the risk involved,” he says. There’s one part of the article he doesn’t like. “They call us ‘skittish.’ We’re not skittish. We’re burned. We’re not grabbing the hot poker this time. They can shove it.”
If the Fed cuts interest rates, will that bring him back? He looks up in the sky. I’m trying to press him about a tense he’s dropped from his vocabulary. The future doesn’t exist.
“The search for yield never ends. But if you think that putting more money out there is going to make us forget what is happening, then I’ve got some subprime backed mortgage bonds to sell you,” he says.
He smiles. He holds two fingers up, a gesture requesting one of my cigarettes. I pass him one, take one for myself, light both. He asks me if I want another martini. It’s not yet noon. I decline on the grounds that I’ve got to get back to DealBreaker’s bunker for my writing and editing duties.
“That’s you man,” he says. “That’s you.”

(hidden for your protection)
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15 Responses to “The Commercial Paper Crunch
Midmorning Cocktails and A View From The Buyside

  1. Anonymous says:

    Carney, more prose please.

  2. Jamie.BuchersGhost says:

    Anon 1:33
    you know u won’t here shit while the yanks are on !!

  3. EJM says:

    great “private eye” style.

  4. been here done this says:

    Oh Please….Spare us the cry of FOUL! Most if not all ABCP buyers have dedicated credit teams that pour over monthly trustee reports and track every movement in and out of these conduits. Go ahead keep your money in TBills. Im sure the Institutional Money you run will not mind that you are sacrificing 3% of yield. The UNMITIGATED GAUL!

  5. B2B says:

    very “film noir”

  6. Eustacia Vye says:

    I’m skeptical that any money manager worth his salt would admit to reading the journal for purposes other than gossip. That being said, I too am a fan of the prose, for reals….but since when do you forsake jamesons for (blush) gin? be still my english heart!

  7. Price Inelastic says:

    I’m curious how the rest of the day’s posts would have turned out had Carney kept drinking (and drinking), methinks that should be another experiment repeated sometime in the near future.

  8. ian says:

    Yeah but whats the point of taking any risk for what is supposed to be cash? Is the extra 3 to 5 to 10 bps really worth it?

  9. the Market M.A.C. says:

    “The banks are swimming in conflicts over these conduits.”
    That’s the funniest shit I’ve ever heard. Banks syndicate risk, they’ve always been full of conflicts. You think people buying IPOs in in 1929 didn’t say…
    “They’re on the hook if they can’t sell the paper. Now we know you can’t trust them about the risk involved,”
    A bank defines risk as its ability to get rid of shit on a bad day (Var). So if hedge funds are buying then, it ain’t risky until the music stops. Also, these are fixed income products, why are hedge funds so apt to sell except for incredible short sightedness?…and leverage of course, which you know is their own fault.
    This whole whining post also assumes that the bank knows what this shit is worth in the first place. What was the first CAT Bond worth, the first CDO, the first CDX contract? Sometihng worth whatever someone will pay you for it.
    Maybe this guy should just close up shop and allow the invisible hand to reallocate his assets in a more optimal manner.

  10. Fake Jeff Skilling says:

    In my Houston trial, I tried to get a jury of 12 “Joe Sixpacks” to understand “VaR”. They looked at me like a turkey looking at a new feeder. “VaR” is a lighthouse for the soon-to-be financially shipwrecked and remember: “VaR” assumes you are doing nothing about your risk to begin with. Like me, “VaR” is as useless as teats on a boar hog.

  11. Sandy says:

    Pfft! I’m so hardcore, I don’t even read.

  12. gab says:

    “The unmitigated Gaul.” Good one – all the Gauls I ever knew were unmitigated and so was their gall.

  13. been here done this says:

    my assumption was that the anonymous “deep throat” works for BNP, Calyon or Socgen. Only the bonehead french would be on vacation for all of august…the UNMITIGATED GAUL.

  14. cake says:

    Your liver pays dearly now for youthful magic moments,
    But rock on completely with some brand new components.
    How do you afford your rock’n’roll lifestyle?
    How do you afford your rock’n’roll lifestyle?
    How do you afford your rock’n’roll lifestyle?
    Excess ain’t rebellion.
    You’re drinking what they’re selling.
    Your self-destruction doesn’t hurt them.
    Your chaos won’t convert them.
    They’re so happy to rebuild it.
    You’ll never really kill it.
    Yeah, excess ain’t rebellion.
    You’re drinking what they’re selling.
    Excess ain’t rebellion.
    You’re drinking,
    You’re drinking,
    You’re drinking what they’re selling.