The Commercial Paper CrunchMidmorning Cocktails and A View From The Buyside

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I 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.”

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