In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Thursday, April 17, 2008

Credit Crisis: Third Wave

by Calculated Risk on 4/17/2008 12:29:00 PM

Professor Krugman writes: It’s my TED! Mine!

OK, OK ... Today I'll just stick with the A2/P2 spread from the Fed's commercial paper report.

A2/P2 SpreadHere is a simple explanation of this chart: This is the spread between high and low quality 30 day nonfinancial commercial paper.

What is commercial paper (CP)? This is short term paper - less than 9 months, but usually much shorter duration like 30 days - that is issued by companies to finance short term needs. Many companies issue CP, and for most of these companies the risk of default is close to zero (think companies like GE or Coke). This is the high quality CP. Here is a good description.

Lower rated companies also issues CP and this is the A2/P2 rating. This doesn't include the Asset Backed CP - that is another category. (see commercial paper table).

The spread between the A2/P2 and AA paper shows the concern of default for the A2/P2 paper. Right now that concern is still pretty high.