Wednesday, October 15, 2008

creditworthiness is built at the long end of the curve

one more point on my theme about fixing the credit market:

creditworthiness is built at the long end of the curve: if investors don't trust a company enough to lend it money over the next 5, 10, or 30 years, is it a safe borrower? would you be willing to accept its short-term overnight paper as the equivalent of cash in money market accounts?
the answer is obviously NO. no borrower could ever get the needed A1-P1 ratings without a deep pool of assets and access to large amounts of liquidity (ie, open "bank lines").

A1-P1 is equivalent to AA/Aa, the highest realm of debt in the universe short of the sacred AAA. from my experience covering the debt market, I have never seen a major CP issuer lack a full docket of bonds scattered across the yield curve. therefore, it's logical to conclude that a solid CP issuer MUST HAVE functioning access to the longer-term debt market. while there are probably some exceptions, and no one has written this as a rule, this is generally how things work. we cannot at this point hope to stabilize the interbank market without first stabilizing the term debt market. that's why the government must provide support to the corporate-bond/ABS market right away.

also, this disaster is looking more and more like the great depression, where the policy makers focused on the wrong problems. in 1931, they fought the wrong war by worrying about recession. I believe that in 2008, we might be focusing incorrectly on the intrabank market rather than a functioning term-debt market. history repeats itself, but there is always a twist.

1 comment:

midnightrambling said...

Hear, hear. But the government has tried to fix the wrong thing before, not just during the Great Depression. Wish I understood more of your terminology.