Commercial Paper - Defaults

Defaults

Defaults on high quality commercial paper are rare, and cause concern when they occur. Notable examples include:

• On June 21, 1970, Penn Central filed for bankruptcy under Chapter 77 of the U.S. Bankruptcy Code and defaulted on approximately $77.1 million of commercial paper. This sparked a runoff in the commercial paper market of approximately $3 billion, causing the Federal Reserve to intervene by permitting commercial banks to borrow at the discount window.This placed a substantial burden on clients of the issuing dealer for Penn Central’s commercial paper, Goldman Sachs.

* On January 31, 1997, Mercury Finance, a major automotive lender, defaulted on a debt of $17 million, rising to $315 million.

• Effects were small, partly because default occurred during a robust economy.

• On September 15, 2008, Lehman Brothers caused two money funds to break the buck, and led to Fed intervention in money market funds.