Companies were holding overvalued paper

Question

The bubbles did burst, and it was discovered that most banks and investment companies were holding overvalued paper.Global financial markets have lost more than $6 trillion in value this monthDoes this mean that companies were the values?The word paper doesn't have a specified meaning, right?ThanksLiJ

Hoa Thai · Accepted Answer

LiveinjapanThe bubbles did burst, and it was discovered that most banks and investment companies were holding overvalued paper.Global financial markets have lost more than $6 trillion in value this month

Does this mean that companies were the values?
The word paper doesn't have a specified meaning, right?

Thanks
LiJ

Hi,

In this context, the term paper means "I Owe You" contracts such as mortgage loans. In the past, a bank loaned money to customers to buy houses. If the prices of the properties are lesser than what they were at the time of money disbursement, the bank holds overvalued paper. If the customers default on their loans, the financial value of the bank would be less.

Avangi · Answer

Hi LiJ,

I'm probably the worst person to talk about money.

Banks and investment companies are different from manufacturing companies because manufactures have valuable equipment and inventories of materials and products. They often hold valuable patents for products people want to buy and they own brand names that people trust. All these things could be converted to cash if necessary.

Investment companies on the other hand buy stock or loan money to manufacturers, hoping the manufacturers will do well and pay them lots of interest etc. Banks loan money to homebuyers, supposedly based on the real value of the property. They hold paper, or stock certificates, or promisory notes whose value depends on how well the manufacturers are doing and how good business is. When business is good their "paper" increases in value. When business is bad it decreases in value. If a manufacturer goes bankrupt it's stock can suddenly be worth zero.

When the stock market is going up, stocks can be trading for more money than can be justified by the real value of the manufacturers who issued them. Their price becomes inflated, or the "paper becomes overvalued." People continue to pay more for the "paper" than it's worth, because they think the price will continue to rise, and they'll be able to sell the stock at a profit.

Best wishes, - A.

Liveinjapan · Answer

Thanks, Hoa Thai and Avangi.

Got it!

By the way, I wrote 'Does this mean that companies were the values?' earlier in this thread. I don't understand why I wrote this. I don't think it makes sense.

Marius Hancu · Answer

It's about
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commercial paper

1 : short-term negotiable instruments (as bills of exchange, checks, and promissory notes) arising out of commercial transactions; especially : instruments constituting direct obligations of business firms that are sold through note brokers to banks, corporations, and other investors seeking liquid investments

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Liveinjapan · Answer

That's good to know. Thanks, Marius.

Avangi · Answer

LiveinjapanBy the way, I wrote 'Does this mean that companies were the values?' earlier in this thread. I don't understand why I wrote this. I don't think it makes sense.

I took it to mean no [paper] value=no company (in the case of an investment company, as opposed to eg. a manufacturing company)

Companies were holding overvalued paper

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