WHAT IS 'Fine Paper'

Fine paper is a type of commercial paper. Commercial paper are securities issued by companies to raise money for specific projects, in exchange for a short-term investment.

BREAKING DOWN 'Fine Paper'

Fine paper is commercial paper issued by blue-chip companies. Commercial paper is a type of investment offered by companies, not banks or governments. Commercial paper is similar to a bond in that it is issued for a specific amount of time at a specific rate, but it is issued by a company to raise money for some specific purpose instead of by a bank or financial institution or by the U.S. Treasury or a municipality. Commercial paper is an unsecured investment, because each issue is not backed by anything. If the issuing company defaults, there is nothing the investor can claim as compensation.  Other characteristics of commercial paper are that it is not insured by the Federal Deposit Insurance Corporation (FDIC), it does not need to be reported to the Securities Exchange Commission (SEC), it has short durations until the loan is mature and the returns are usually much lower than are available for other types of investments. 

Blue-chip companies are large, have usually been in existence for decades and are viewed as being solid and traditional. This means that there is little risk that the established companies will default on the loan issues, so fine paper is an extremely safe investment. The only safer investment is government-issued fixed-income securities, so fine paper usually trades at a very small spread over these securities.

Investors would choose fine paper to invest in because it is a good, safe place to put money for a short duration of time, typically less than a year, with little risk and no need to report to the SEC.

Fine Paper in the Crash of 2008

When global economic markets crashed in 2008, one of the most serious effects was a credit crunch, in which banks and financial institutions were afraid and unable to lend money. This cascaded into the commercial paper market, because as unsecured investments, commercial paper was suddenly seen as significantly riskier than it had ever been. Fine paper, too, was seen as too risky for investors to justify. Despite the fact that the companies issuing fine paper were blue-chip companies, the public and investors were aware that financial companies that had been seen as "too big to fail" had been on the verge of collapse before the government bailout, so size didn't seem to guarantee protection anymore  The credit crunch delayed recovery from the crash, but eventually lenders began lending again and investors were able to invest in unbacked securities, and the commercial paper market recovered.

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