Commercial-Paper Market Seizes Up

Commercial-Paper Market Seizes Up

By ANUSHA SHRIVASTAVA

The commercial-paper market, where companies go for short-term funding, broke down Thursday as credit fears paralyzed investors.

These investors include money-market funds, which face redemptions from customers concerned that their money is no longer safe.

"We are not functioning in the short-term credit market," said Howard Simons, a strategist with Bianco Research in Chicago. "We have issuers who can't issue and buyers who won't buy. How can this market function?"

Earlier this week, troubles at American International Group Inc. caused many investors to concentrate their buying in extremely short-term paper that carried a one-day maturity. By Thursday, however, even that buying dried up.

There is a "buyers' strike," one trader at a primary dealer said. "There is a snowballing effect when people get nervous and want to get their money out of money-market funds," he said, noting that these funds then can no longer invest in the commercial-paper market.

Tuesday's announcement that the Reserve Primary Fund "broke the buck" -- its net asset value fell below $1 -- sent a shudder through the money-market community. Thursday, Putnam Funds said it has closed its institutional Putnam Prime Money Market Fund following a surge of redemption requests.

"With money-market funds having redemption issues and big dealers disappearing, this market cannot work," Mr. Simons said, adding that some of the big dealers on Wall Street, such as Lehman Brothers Holdings Inc., are gone, too.

"It's symptomatic of the chaos that's going on," he said. "We are taking institutions apart."

Investors have demanded higher premiums for investing in commercial paper, and even then, mainly bought paper that matured in just one day. Rates shot up to between 5% and 8% on overnight paper, from a little more than 2% the week before.

Even triple-A-rated companies, such as International Business Machines Corp., had to pay 6% in the overnight commercial-paper market, said Thomas Corona, a senior vice president at Tradition Asiel Securities Inc.

The commercial-paper market shrank by $52.1 billion in the week ended Wednesday, according to data from the Federal Reserve. This is the largest weekly decline since December.