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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Michael Friesen who wrote (826)	3/23/1999 5:52:00 PM
From: accountclosed	Read Replies (1) \| Respond to of 2794

Let me give this a modest shot and Henry will correct it. Prior to disintermediation, the basic model on short term money was that everyone deposited their money in banks and banks in turn lent out money to corporations and individuals. The bank was the intermediary in those transactions. However, large pools of capital developed such as petrodollars and the oil producing countries said that they could sidestep the banks and lend directly to companies for their short term needs cutting out the middleman. The commercial paper market developed in this way. GE, for example, can borrow short term money directly from the marketplace without using commercial banks as a middleman. Similarly, investors weren't satisfied with just achieving bank account returns (sometimes zero) so they put their money in money market funds which could invest in various instruments by regulation including cd's, treasuries, highly rated commercial paper etc. However, realize that someone is making the decision to lend. GE can only tap the commercial paper markets because of their outstanding credit ratings. Other companies can do so at rates appropriate to their credit ratings. Someone is making the decision to purchase that paper, whether it is a money market fund, a high net worth individual, or a corporate treasurer. Similarly, the eurodollar market is a market for banks to lend to banks in. Very highly rated companies like GE (which is a bank) can enter the market only if a bank will lend to them on the market. In fact what happens is smaller companies still borrow from the bank. The bank makes the credit decision. And based on various factors, including credit ratings whether public like Moody's or private, i.e. the bank's own due diligence...the banks decides whether to lend or not and at what spread above libor. They then borrow the funds on the libor market and the spread is their gross profit to cover overhead, credit losses, and profits. The futures market is a place where variable rates like libor are locked in now. Anyone can participate like in other futures and options markets if they have sufficient margin. One of the main functions of this market is locking in today a rate for tomorrow...interest rate swaps...Thus your libor plus 3% loan could be converted into perhaps a fixed rate at 8% for three years. Henry...get out the editing pencil... <g>

To: Michael Friesen who wrote (826)	3/24/1999 10:32:00 AM
From: Henry Volquardsen	Respond to of 2794

Hi Michael, long time, no chat. The simple answer is the free market. The lenders give the go ahead on who they will lend to, whether it is the credit committee of Citibank, a Vanguard money market fund or you and I making a decision to buy commercial paper or a CD from a bank. As far as who checks that Joe's Construction can't get borrow at the same rates General Electric, nobody checks. If someone wants to lend to a presumably lower quality credit at the same rates as GE that is their business. Most of the market will demand a premium for the lower credit and these supply/demand factors will create the spread. Henry