Wednesday, October 1, 2008

More evidence that credit markets would perform better on the Sun

Loanable funds are still frozen, frozen, frozen. Perhaps the credit markets should be relocated to the Sun’s surface, where its 5,780 Kelvin temperature (really hot) will sooth the credit markets’ frozen bones.

Here is yet another sign that credit problems persist and that the credit horizon does not look good.

“AT&T Inc. (T, Fortune 500) Chairman and CEO Randall Stephenson said Tuesday that his company was unable to sell any commercial paper last week for terms longer than overnight. Commercial paper, which helps lubricate the flow of business operations, is a short-term IOU available to corporations that banks usually know are good for the money.

It's not that short-term borrowing is unreasonably expensive, Stephenson said. A shortage of buyers for the debt means such borrowing is not as readily available as it had been even three weeks ago, he said.

'It's loosened up a bit, but it's day-to-day right now. I mean literally it's day-to-day in terms of what our access to the capital markets looks like,' Stephenson said. AT&T spokesman Larry Solomon said later that as of Tuesday, the company has ready access to the commercial paper market at reasonable rates and various terms.”

If AT&T – with its 71.4 million wireless customers and more than 150 million total customers – can’t secure credit for longer than a day, what business can?

Rebecca Wilder

5 comments:

  1. This is an ugly reoccurring trend that I first read on Financial Ninja about, I believe it was BOA suspending any more lending to McDonalds, the world's largest and most successful chain restaurant.

    You said it best, "If AT&T – with its 71.4 million wireless customers and more than 150 million total customers – can’t secure credit for longer than a day, what business can?"

    Nice post,

    Tim

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  2. I guess my question is: why does all this credit have to exist? Is it not possible for companies to have run their business day-to-day with only cash on hand (or in accounts)? Seems like many small businesses have to operate this way. It is understandable that extra might be needed to expand or something like that. aj ps:the average Joe is only doing what all the big corporations are doing - operating on credit.

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  3. Hi Tim,

    Thanks for the comment! Love this advice for protecting your money:

    If your bank fails, keep making payments!

    R

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  4. Hi Jane,

    I am sure that some of my readers actually own a business - or are accountants - and can answer this better (feel free). However, a business, especially a corporation, rarely has sufficient cash on hand to manage day-to-day operations. We are talking about funds deducted from accounts receivable, or anything that would need to be paid for upon delivery. It just isn't profit-maximizing, let alone slightly risky, to hold on to that much cash.

    So, given that the firm is not going to hold enough cash, it has two choices: go to the bank for a short-term loan, or go to the commercial paper market. The commercial market is easy and facilitates speedy credit transactions without assessing too much credit risk, since the loan terms are usually very short term.

    Visit the Fed website, http://federalreserve.gov/releases/cp/, and you can see the different categories of commercial paper term lengths and rates.

    You are the best, R

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  5. Seems like one could have laddered accounts so that funds are invested but yet can be available on very short notice. Understand about the accounts receivable but I try living in a dream world once in a while.

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