Friday, August 10, 2007

Subprime hits commercial paper

Commercial paper, the assets that are used to back a wide variety of financial instruments have hit their highest rates since 2001.

This is a great example of panic in the marketplace: investors are demanding higher yields on commercial paper because some of them contain mortgages. Note the word "some" -- commercial paper is used to back everything from auto loans to insurance underwriting as well as small business loans. But because of the subprime crisis, the general trend right now is towards an evaporation of lending capital.

Investors can't sit on the sidelines forever -- pension funds aren't going to meet their obligations by putting a few billion dollars in money markets and interest-bearing checking accounts. To ease this liquidity crunch, we're seeing moves by a wide variety of central banks to put money into the system. At my last count, the European Union, the Australians, the South Koreans, and others are making what are more or less emergency loans.

What does this mean for you as a business owner? Expect the costs of doing business to go up, for one thing. If you've been thinking of getting a line of credit or a business loan, act now to lock it down, because the deal on the table today may very well not be there tomorrow.

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