Saturday, October 4, 2008

Time to Climb Off the Ledge?

You are well aware, Dear Readers, that much has been and is continuing to be made in the press of the terrifying, relentless, and cruel monster known as the Credit Crunch. This unappeasable beast has apparently moved on from snacking desultorily on the tattered remains of those few financial institutions still drawing labored breath to attacking pure and innocent victims in the non-financial sector, like General Electric and AT&T. Attentive readers of this space will also be aware that your Dedicated Correspondent has remained simultaneously less than alarmed and less than impressed by the supposed magnitude, terror, and destructive force of this purported monster, at least as far as it affects the non-financial economy. Some of you tender souls may be struggling with whom to believe.

Well, in an effort to wrap some more data around this scary bedtime story, the Financial Times reported yesterday that investors pulled $95 billion out of the commercial paper market for the week ended October 1st, and $200 billion over the last three weeks. Frightening, huh?

Of course, a little further reading in the piece (three sentences, in fact) would reward you with the information that—notwithstanding this catastrophic hemorrhaging of the day-to-day economy's lifeblood—total outstandings in the commercial paper market clocked in last Wednesday at an impressive $1.6 trillion. Which, frankly, sounds like a hell of a lot of money to me.

Furthermore, a little independent research visit to the Federal Reserve Board's official data release will lead you to grasp a slightly more nuanced picture than the one being peddled by the newspaper vendors in the mainstream media. It turns out, for instance, that of the $94.9 billion less invested in commercial paper last week, $64.9 billion was pulled out of financial companies, $29.1 billion less was invested in asset-backed commercial paper, and $0.8 billion was pulled out of non-financial CP. Of which, you will be relieved to hear, domestic non-financial CP outstanding declined by a stunning, seasonally-adjusted total of 0.0 dollars. That's right: zero. Zilch. Nada.

Now, to be fair, total non-financial CP outstanding of $199.1 billion only comprises 12.4% of the entire commercial paper market, so by belittling the non-existent collapse in non-financial CP I do not mean to suggest that all is well in finance- and asset-backed-land. In fact, conditions there are factually pretty bleak, and do not seem to be improving or even slowing their rate of decline at all.

Nevertheless, the non-financial CP market looks pretty damned healthy to me. At $199.1 billion, there was more non-financial CP outstanding as of October 1st than at any month end from March to September 2008, and substantially more than year-end outstandings of $167.1 billion and $162.7 billion in 2006 and 2007, respectively. Furthermore, looking back over a longer period, the graph below demonstrates to me that the non-financial commercial paper market looks like it has survived the recent storms racking the credit markets in remarkably good form, continuing a growth trend which started in 2004.

Now, the corporate credit markets in aggregate are huge, and I readily acknowledge that a $200 billion sub-sector is too slender a reed upon which to rest a robust argument that all is well in the commercial funding markets. But the data in this instance do not support the fashionable screed that the sky is falling, either.

Other reports of doom and gloom from around the fixed income markets leave me similarly underwhelmed. The leveraged loan market is mostly closed to new issuance, sure, but whom does that harm? A bunch of private equity buyers and the extensive outsourced ecosystem of bankers, lawyers, accountants, and other flunkies who used to support them, plus a few highly levered companies, that's whom. Corporate debt spreads to Treasuries have blown out to impressively wide levels, but casual commentators fail to notice that that is primarily because Treasury yields are in a rapid nose dive toward zero. Absolute borrowing levels for companies which can get access to the market remain at historically attractive levels. (Likewise, those fortunate individuals who can qualify for a mortgage nowadays have noted that mortgage rates remain remarkably reasonable.)

We have seen some eye-catching shucking and jiving by a few industrial companies to gain access to funds. Fabled economic bellwether General Electric just toddled off to Omaha to get raped over a barrel by everyone's favorite sugar daddy, Warren Buffett, in exchange for some onerous preferred equity finance. But again, most of the mainstream media seem to gloss over the fact that GE did so because its giant financial services division makes it look a helluva lot like a bank, and a dodgy bank at that. GE Financial Services accounted for more than half of GE's consolidated earnings, carried over half a trillion dollars of debt, and accounted for more than 82% of GE's balance sheet at the end of the last quarter. Given that GECS has no nice, stable retail deposits to fund its massive lending activities, it is little wonder that Jeffrey Immelt chose to strap on his kneepads and go visit Warren for an extremely lopsided vote of confidence.

Sure, sure, the sky is falling on friend and foe alike in the financial sector, and the damage is likely to spread from these shores to other jurisdictions. Non-financial companies cannot afford to be complacent, because the turmoil in the credit markets—and the banking and investment banking intermediaries in particular—can become dangerously disruptive to any company's ability to raise borrowed funds on demand. Furthermore, the credit crisis will further disrupt the real economy in ways that will harm the balance sheets and income statements of non-financial companies, as well.

But what all this sturm und drang really means for the average corporate Treasurer and CFO is that they are going to have to look a little earlier, and a little harder, for the money to keep their company running than they have had to do during the last several years. Corporate treasury departments have been enjoying an extended period of super liquidity in which all they had to do to raise beaucoup bucks was wink at a bank or two and show a little leg. Now, the environment is returning to a more normal one, in which money is donning its traditional guise as a scarce and expensive resource.

Treasurers may actually have to begin working for a living again, but I feel confident in predicting that the world will not come falling down about their ears for some time yet.

Now, if we could only get some levelheaded reporting from the financial press—instead of regurgitated talking points from their stooges in the banking industry—we might just prevent the widespread popular panic which could take the economy down for real.

* * *

UPDATE (6 October 2008) — Bloomberg News has now decided to climb on board the Panic Train this morning, too. Although, once again, a close reading of the article will show that non-financial companies do indeed seem to be able to raise money, through alternate means, if necessary.

Companies from Goodyear Tire & Rubber Co. and Duke Energy Corp. to Gannett Co. and Caterpillar Inc. are being forced to tap emergency credit lines or pay more to borrow as investors flee even firms with few links to the subprime-mortgage debacle.

Golly! Imagine the shame: having to tap emergency credit lines, or—Heaven forfend!—actually paying a little more for money. Oh, the humanity!

I really am beginning to lose patience with people, whether in business, government, or the media, whose primary panicked complaint nowadays seems to be that potential lenders are no longer willing to hand them enormous amounts of free money on a platter.

Grow a fucking pair, you pansies. You can bet that any Corporate Treasurer worth his pay grade already has.

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