Re: all the ted spread is telling you

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

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