> -----Original Message----- > From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED] On > Behalf Of John Williams > Sent: Thursday, September 25, 2008 4:20 PM > To: Killer Bs (David Brin et al) Discussion > Subject: Re: Do low-probability catastrophic risks justify the bailout? > > Dan M <[EMAIL PROTECTED]> > > > > Because I believe that historical data is useful. I think this is a > point > > where we have very strong differences. In your replies to most, you > tend to > > ignore/snip a wealth of data that have been presented. > > Here's some data for you. > > http://www.federalreserve.gov/releases/cp/ > > For terms between 1 and 90 days, the highest AA nonfinancial commercial > paper interest rate is 2.23%. Looks fine to me. > > Even the AA financials are paying at most 3.3%. > > The only trouble spots are the A2/P2 nonfinancials (risky companies)
First, thanks for grabbing the website and pointing it out to the list. It looks like good primary data: the kind I like. But, you talk as though A2 represents risky companies. Let me present several rating system sites: First at http://www.blaha.net/Finance%20Corporate%20Debt%20Ratings.php We see that the comparison is between AA and A bonds (a footnote points out that AA and A can be broken into subsets: AA1, AA2, AA3, A1, A2, A3, etc. So, A2 is the middle of the A range. We also see the default rate within 5 years for A bonds is less than 0.025% over a 5 year period between '70 and '01. The actual default rate is less than AA bonds (one big mistake can do that). Then at http://www.riskglossary.com/link/commercial_paper.htm we have the less quantified Superior vs. Satisfactory. This is less quantitative than the first site, but it does point out A2 and P2 are the same. Risky bonds are two categories below P2. For additional sites, we have: http://www.investopedia.com/articles/03/102203.asp which calls A as low risk Finally, let's go back to your curves. The second one is the one I wanted to focus on because it plots the spread in curves: which is a good measure of the aversion to risk. For the most part, the discount rate spread has been, since 2001, in the 20-40 basis point range. That is not the type of spread one associates with high risk. All of a sudden, it peaks to 400 basis points for non-financial paper. The last recession/big stock market drop, which added to the feel of insecurity, peaked at about 90 basis points. The previous peak in this crisis was about 140. The latest peak is 400 and rising. This is for a market that fully expected a bail-out. Even so, companies that have no exposure to the financial risk of banks are finding their short term financing rising by more than a factor of 4. That measures a flight to the highest quality. For example, do you really think the odds of GE defaulting on 1 day paper is significantly higher than it was 2 weeks ago? Dan M. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
