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December 5, 2007

Commercial Paper Problems

Liquidity still isn't going where it's needed:

Commercial Paper Has Biggest Weekly Drop Since 2000, by Darrell Hassler, Bloomberg: Outstanding U.S. commercial paper fell 4.23 percent, the biggest weekly drop in almost seven years, as investors fled asset-backed debt and opted for the safety of Treasuries. ...

The retreat may indicate that the Fed's decision to lower the discount rate last week failed to instill enough calm to draw back investors. Commercial paper backed by assets led the fall as buyers fled debt linked to subprime mortgages. ...

'The shrinkage of the commercial paper market will force companies to obtain money elsewhere,' [Tony] Crescenzi ... said ... 'Some will be unable to obtain funding and will shut or scale back their operations.'

The decline in outstanding commercial paper was driven by a 6.8 percent fall in asset-backed commercial paper, which represents about half the commercial paper market and has been used to finance purchases of subprime mortgages.

The Fed lowered the interest rate it charges to lend to banks to encourage buyers of commercial paper after the market seized up last week...

'There is a significant amount of cash in the system, it's just not getting to the parts of the market that need it,' Conrad DeQuadros, a senior economist at Bear Stearns Cos., said...

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