TED Spread heading to 4.4%.

Post #297,783 by Another Scott 10/10/08 8:07:07 AM Reply	TED Spread heading to 4.4%. So far this morning, it's not looking like Paulson's comments yesterday that the US is willing to buy equity stakes in banks is having any effect. The TED spread is still increasing - heading to 4.4% http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND The LIBOR and other international rates are rising and lending isn't increasing. http://www.bloomberg.com/apps/news?pid=20601087&sid=a4r3HnlEV2jo&refer=worldwide The Nikkei 225 stock index in Japan was down 9.6% today, and other world indexes are down as well http://www.nytimes.com/2008/10/11/business/11markets.html?hp=&pagewanted=print Perhaps Paulson and Bernanke in the US, and their G7 and IMF counterparts will take Krugman's advice and do something concrete to demonstrate that they're not going to let the financial system contract any more. He says they've got until Monday http://www.nytimes.com/2008/10/10/opinion/10krugman.html?hp === begin cut === The consequences of LehmanÂs fall were apparent within days, yet key policy players have largely wasted the past four weeks. Now theyÂve reached a moment of truth: TheyÂd better do something soon Â in fact, theyÂd better announce a coordinated rescue plan this weekend Â or the world economy may well experience its worst slump since the Great Depression. [...] The United States should have been in a much stronger position. And when Mr. Paulson announced his plan for a huge bailout, there was a temporary surge of optimism. But it soon became clear that the plan suffered from a fatal lack of intellectual clarity. Mr. Paulson proposed buying $700 billion worth of Âtroubled assetsÂ Â toxic mortgage-related securities Â from banks, but he was never able to explain why this would resolve the crisis. What he should have proposed instead, many economists agree, was direct injection of capital into financial firms: The U.S. government would provide financial institutions with the capital they need to do business, thereby halting the downward spiral, in return for partial ownership. When Congress modified the Paulson plan, it introduced provisions that made such a capital injection possible, but not mandatory. And until two days ago, Mr. Paulson remained resolutely opposed to doing the right thing. But on Wednesday the British government, showing the kind of clear thinking that has been all too scarce on this side of the pond, announced a plan to provide banks with £50 billion in new capital Â the equivalent, relative to the size of the economy, of a $500 billion program here Â together with extensive guarantees for financial transactions between banks. And U.S. Treasury officials now say that they plan to do something similar, using the authority they didnÂt want but Congress gave them anyway. The question now is whether these moves are too little, too late. I donÂt think so, but it will be very alarming if this weekend rolls by without a credible announcement of a new financial rescue plan, involving not just the United States but all the major players. === end cut === Fingers crossed... Cheers, Scott. (Who is trying to live by "buy low, sell high")
Post #297,786 by boxley 10/10/08 8:37:43 AM Reply	all the ted spread is telling you is the banks are sucking up federal money and buying t-bills with it instead of cross bank lending. I saw an article in the wsj that compares banks with poker players in a game where they know some players are broke but not which ones. The game gets played with minimums until the broke people are identified. No more cash infusion until true book is brought to light. thanx, bill
Post #297,787 by boxley 10/10/08 8:40:34 AM Reply	Re: all the ted spread is telling you here is the link http://wsj.com/article/SB122351071819917433.html
Post #297,795 by Another Scott 10/10/08 1:13:00 PM Reply	That's not my understanding. My understanding is that banks aren't lending due to rules about how much leverage they're legally able to have. I believe US banks legally can only have a leverage factor of 10 (if they have $1B in capital, they can only give out $10B in loans). When their capital shrinks or dries up, as is the case when they have to write off $500k mortgages that are now worth $250k, it causes their capital to shrink and thus they can't loan more without being undercapitalized. The way out of this problem is to recapitalize the banks to make up for the "credit default swaps" (which were really insurance policies, but not called that because insurance has regulations that the banks and brokers didn't want to abide by) losses and mortgage losses. Paulson's plan of taking the "toxic debt" off the banks books won't work because it's too difficult to figure out what the things are worth. The simplest and most transparent solution is for the USA to buy preferred shares in the banks, directly injecting fresh capital. Once they're recapitalized, the write-downs of the CDS and mortgages can take place over time. The TED Spread is an indirect measure of non-US-Treasury credit risk. The spread used to be 0.25 - 0.5%. At the moment, it's over 4.61%. Well capitalized banks aren't willing to loan to other banks because if those banks are found to be undercapitalized by the FDIC and/or Treasury, then they'll be taken over at fire-sale prices. The lending bank would then be damaged by the loss. It's not that they're investing in Treasuries instead. So, while the TED Spread isn't a direct or causal measure, it's a very important indirect indication of what's going on in the credit markets. It should drop quickly once the banks are recapitalized. The destruction of the financial markets will continue until it drops dramatically. That's my understanding, anyway. Fallows has some anecdotal reports on what we're in for if lending doesn't loosen up very soon: http://jamesfallows.theatlantic.com/archives/2008/10/i_wish_we_had.php :-( Cheers, Scott.
Post #297,800 by jay 10/10/08 2:49:40 PM Reply	Both problems are happening Both the problem you mention and what Box mentions about above are happening. The TED Spread is mostly a measure of what Box is talking about though. The TED spread is the difference between what banks are charging each other and what T-Bills are getting. If the spread is high that means banks are favoring T-Bills right now. And considering that the interest on T-Bills is nearly zero right now, it has to be because they don't trust the other banks. The problem you are talking about is reflected more in the difficulty people are having with getting big loans for finance. Banks don't have the money they used to because their capital is shrinking, and thus they are limiting themselves to the safest and best bets for themselves. Of course, those two problems are interrelated. A big part of the reason for the first problem is the second problem. Shrinking capital is making banks insolvent and since the banks don't know who is likely to go, they don't trust anybody. And the second problem also causes the first, because it is so expensive for banks to borrow right now, it costs banks more to cover any shortfalls. So they have to keep more money on hand rather then use it for loans. Jay

Welcome to IWETHEY!