One of the few instances when either Malloy or Reed is wearing blue jeans in casual circumstances, in this case Reed.
Paper hanger is slang for someone who knowingly passes bad checks in whatever form (forgery; insufficient funds in one's own account as two examples), and/or counterfeit money. NSF refers to insufficient funds on the account to cover the check.
Muscatel is a type of white wine made from muscat grapes.
Code 2 = urgent, no lights or siren.
Malloy drives a gold 1967 Ford Mustang coupe with a white vinyl top. When he pulls up in front of Reed's house the Mustang grill emblem (galloping horse) is covered with black tape.