From FT Alphaville:
Conditions more or less resemble a bank run on the system.
As the freeze in the money markets persists, credit is rapidly becoming either completely unavailable or punitively expensive. This presents the world with an immediate risk of a surge in defaults as borrowers are unable to refinance. Needless to say, without an ability to lend, an economic depression threatens, as defaults erode bank capital and lending ability further. The countdown to a dramatically bad economic outcome is therefore running at very high speed. Unchecked, the current crisis would turn into a self-reinforcing vortex of defaults, bank capital contraction and deep recession within a matter of weeks.
From the man at Barcap, Tim Bond.
The numbers on which Bond bases his analysis couldn’t really be clearer. Interbank lending really has collapsed on all but the shortest maturities of debt.
The commercial paper markets have choked off the supply of credit to America’s corporations.
Unless the TARP plan is instigated within the next few days, a systemic crisis could well be realised.
Even if the TARP is launched, however, the outlook is not positive. As Bond notes, the process of recapitalisation will be a lenthy and convoluted affair for banks.
Consider, for example, the significance of Goldman Sachs and Morgan Stanley reclassifying as commercial banks and Merrill Lynch being taken over by one.
Bank of America’s leverage ratio - similar to most commercial banks’ is 11:1. In contrast, Goldman Sachs runs a ratio of 24:1, MS 30.9 and Merrill Lynch 46:1.
To comply with regulatory requirements all of those banks are going to have to go through a very significant deleveraging process. As Gillian Tett noted in the FT earlier this week:...MORE
Three posts at MarketBeat this morning touch on credit contraction and money hoarding:
GE Is a Microcosm of the Economy. This Isn’t Good Right Now.
...The announcement makes painfully clear how GE serves as a microcosm for the economy, in a number of ways. For one, it needs money, so it’s hoarding cash....Fortress Locks Up Dividend
Private-equity firm Fortress Investment Group LLC won’t pay a third-quarter dividend, electing instead to retain capital and invest it....
And in the latest, he spells it right out:
Neither a Borrower Nor a Lender Exist
Once again short-term funding rates have ballooned, as investors avoid committing to any paper riskier than what the U.S. government has to offer and any paper with a greater maturity than “sometime in the next few days.”“We haven’t seen this degree of tightness in the money market sector like this probably ever,” says Guy Lebas, fixed income strategist at Janney Montgomery.
What has become increasingly clear over the last 12 months is that operations in these markets carry on as an article of faith. One borrows under the expectation that they will have sufficient funds to repay their lenders. One lends with the hope that they will get their money back. These expectations may be well-founded ones, based on decades of history of such operations proceeding without drama on a daily basis.
Except when there is drama — and then, hoarding occurs....Read it all
