By 12:30 p.m. the phones have stopped ringing and Lawrence Foss can relax a bit.
If it's a typical day, Foss and his staff will have raised several hundred million dollars for Manufacturers Hanover Corp., the giant bank holding company, and its principal subsidiary, Manufacturers Hanover Trust Co., the nation's fourth-largest bank.
But from 9 a.m. until noon or 12:30, the men and women in the money market operation of Manufacturers Hanover will scour the country looking for the money the giant corporation and its lead bank need that day -- and if conditions are right, perhaps pick up a few dollars the bank doesn't absolutely require but might use a day or two later.
Foss' force sells all those abstruse "money market" instruments, the mention of which causes the eyes of all but financiers to glaze over: certificates of deposit, federal funds and commercial paper. Giant banks such as Manufacturers Hanover are money junkies.
In an era when traditional deposits such as checking and savings accounts make up an increasingly small fraction of the funds a bank needs to satisfy its customers' borrowing needs, operations such as the one Foss runs at 44 Wall Street -- miles away from the bank's headquarters in midtown Manhattan -- grow in importance each day.
Many of the bank's deposits must be "bought" from individuals, corporations or pension funds with spare cash. But the bank is not the only financial corporation with cash needs. To find the funds it needs, it must compete not only against other banks such as Citibank (and its parent Citicorp), but against big companies such as General Motors Corp. or U.S. Steel.
On any given day GM might be both a loan customer of Manufacturers Hanover and a competitor for funds in one of the most rapidly growing markets for short-term cash in the country -- the commercial paper market. Last year, the amount of commercial paper outstanding in the United States grew by more than $12 billion, and in 1979 it grew by nearly $30 billion. At the end of 1980, there was #125 billion of commercial paper outstanding in the United States, according to the New York Federal Reserve Bank.
Commercial paper is nothing more than a corporate IOU, a promissory note that one company gives another to rent cash for a day, a week, a month -- up to 270 days at the most. Commercial paper can be sold in denominations as small as $100,000, but usually the certificates come in chunks of $1 million or more.
Because commercial paper is unsecured -- meaning there is no asset a lender can attach to insure he or she gets the money back -- only top-rated companies can sell commercial paper easily. But its attractiveness is clear.
"It's cheaper than bank money," said a top financial officer of a major U.S. corporation that sells commercial paper and also buys it when it wants to earn interest on its share cash for a day or a week. For example, on a day when a bank loan may cost 17 percent or 18 percent, a company may be able to sell its commercial paper for 16 percent.
Commercial paper won't put banks out of business. Companies still have borrowing needs that cannot be satisfied in the commercial paper market, and on days when it is difficult to sell their own paper, they still turn to their banks.
Furthermore, commercial paper is an extremely short-term instrument. Although paper can be issued for up to 270 days, most commercial paper matures in 30 days or less.
Because commercial paper is short term, companies such as Manufacturers Hanover -- with $2.16 billion outstanding at the end of 1980 -- constantly must sell paper not only to help supply funds for increased borrowing but merely to replace outstanding paper that is maturing.
"On any given day we'll sell $40 million to $90 million in commercial paper," according to Joseph Connolly, 31, senior vice president and director of corporate finance for Manufacturers Hanover Corp., the parent company of the bank.
Under banking law, the parent company can provide funding for the bank, but except under the strictest of rules the bank cannot make loans to the parent company. The parent company's chief source of short-term funds is commercial paper. Much of what the parent raises it lends to the bank.
In the morning, Connolly and his associates determine how much money they need to raise that day, where they think it is best to try to sell commercial paper and in what maturity range they want to concentrate. A sophisticated computer printout tells them who are the largest holders of Manufacturers Hanover paper and where those holders are located. Connolly's staff also determines when the currently outstanding paper comes due and the rates the bank is paying.
If Connolly decides, for example, that pension funds hold too much of Manufacturers' paper, he may tell Foss downtown to try to "stay away from pension funds" and concentrate on trying to sell to other potential purchasers.
Because someone holding commercial paper can sell it to another investor before it matures, Manufacturers and other issuers try to spread the paper around. "I don't want $350 million to $400 million of my paper dumped on the market and competing with the paper I'm selling that day," Connolly said.
If Manufacturers has a heavy load of paper coming due in, say, 15 days, Connolly might want to avoid issuing new paper that comes due in 15 days to avoid oversaturating the market with Manufacturers Hanover paper on that day.
By 9 a.m., Connolly's staff uptown and Foss' staff downtown have figured out what Manufacturers Hanover will try to do in the market that day and have put out on the financial wire what Manufacturers is willing to pay in interest that day for various maturities.
"If we want to stay away from 30-day paper, for example, we'll quote a rate that we know is not competitive," Connolly said.
Once the financial officers have determined the company's financing needs for the day, Foss' force goes to work. Foss, 35, a vice president, not only controls the selling of commercial paper for the parent company, but also runs the deposit-gathering operations for the bank.
He said it makes no sense for the bank and the parent company to compete against each other for funds. In addition, if rates in the commercial paper market, say, are better than in the bank certificate of deposit market, it could make sense to sell more commercial paper and fewer certificates.
Five salespersons hit the phones at about 9 a.m. to sell commercial paper for the holding company. They call corporate treasurers to determine their needs and tell them what Manufacturers Hanover has available that day. Corporate treasurers do their own shopping as well. Through contact with these potential purchasers -- from companies to pension funds to wealthy individuals -- Foss and other officers get a feel for which way interest rates are moving. If a major issuer of commercial paper needs a lot of money one day, the issuer may push up the rates it is willing to pay in order to get the money.
"You've either got to go along and pay if you need the money, or sit it out," Foss said. Each of his five salespersons has 50 to 75 commercial paper buyers that he or she is responsible for contacting regularly.
Selling commercial paper is much like selling anything else. The personal contact between the salesperson and the buyer is critical, and the give and take that can occur is not unlike the horse trading between a car salesman and a customer.
The traders, like a car salesman, have some leeway on price. Don B. Taggart, the chief trader for certificates of deposit who filled in last week as chief trader for commercial paper as well, may instruct his sales force to try to get 30-day money at 16 1/4 percent.
"But if it doesn't look like that rate is working, we tell 'em [the salespersons] to yell," Foss said. Manufacturers may be forced to increase what it is willing to pay to 16 3/8 percent.
Foss said that he always tries a little more than the company's projected needs. "Cash forecasting is not perfect," he said, "and we always could get a 'fail.' We might issue a $5-million piece of paper and send it by messenger to the trust department of another bank. But the messenger might go out for a drink instead."
A "fail" occurs when, for whatever reason, the security is not issued properly, accepted and payment made. Suppose, Connolly said, a buyer wanted $10 million of Manufacturers Hanover paper in 10 separate pieces of $1 million each. By mistake, however, the paper is issued on one piece for $10 million and delivered to the purchaser's bank.
"In that case, the bank trust department would be expecting 10 pieces of paper and would refuse to accept delivery," Connolly said.
The bank used computers to issue its paper and has programmed them to try to reduce the types of processing errors that result in fails.
Manufacturers Hanover is one of the five biggest issuers of commercial paper -- behind General Motors Acceptance Corp., Ford Credit, Sears and Citicorp. It sell most of its commercial paper directly, that is, straight to the buyer. i
Many issuers, however -- especially companies who do not sell paper on a regular basis as a bank does -- sell their commercial paper through a dealer such as Solomon Brothers or Goldman Sachs. Even a small regular issuer is more likely to let a dealer market its paper (for a fee) than sell it directly.
"But beyond some point, say when you've got $500 million outstanding, it's better to put those fees in your own pocket and develop your own staff," Foss said.
Manufacturers Hanover, with $2 billion in commercial paper outstanding, would pay about $4 million a year in fees if it sold its commercial paper through a dealer, he estimated.
"That pays for a pretty good staff," Foss said.