Reader Mail: ‘Hot Potato’ of Bad Debt Could Destroy Corporate Finance

How about some reader mail?

“Central banks and investment banks have a symbiotic relationship. In such relationships, one party benefits; in this case, it is the investment banks. But when investment banks introduced questionable subprime CDOs into the asset-backed paper market, they crippled the ability of central banks to maintain the markets necessary for investment banks to profit.
 
“This sudden loss of investor confidence has now prevented commercial banks from selling their hundreds of billions of dollars plus inventory of asset-backed commercial paper to now wary investors. US$156 billion of asset-backed commercial paper was issued in March, only US$5 billion was issued in October. This is a collapse, not a contraction.
 
“Who would have thought banks would end up holding the hot potato of bad debt? This was certainly not the intent of investment banks or their conjoined twin, central banks. Now, German banks, Japanese insurers, and even US insurance behemoth AIG (NYSE:AIG) are reeling from multi-billion dollar losses from their investments in subprime CDOs; and more dangerously yet, it is rumored that money market funds own perhaps $300 billion of this rapidly disintegrating subprime debt.
 
“The backlog of questionable debt has now frozen the ability of credit markets to provide additional credit to junk-rated corporations dependent on such financing; and, the daisy-chain of corporate finance is now in danger of collapse. The consequences will be unprecedented.
 
“This crisis, and it is a crisis, coincides with the emergence of another problem central banks have been avoiding for decades—the collapse of confidence in paper money itself.”

Dan Denning
The Daily Reckoning Australia

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