Here Come the Banks! Good Luck to Anything Else That Needs Financing!

Bloomberg News is reporting that new bank holding company, Goldman Sachs will lead the start of a $400 billion avalanche of new bank bond issuance.  Goldman May Lead New Bank Debt Issuance This bank debt will be backed for the first three years of its life by the full faith and credit of Uncle Sam.  Seeing how this paper is yielding well in excess of risk free Treasury rates (by about 5% or more!), even with the guarantee, expect the bond buying world to gorge itself on this buffet.

Remember of course, that investing, like anything else, is a zero sum game.  If guys like Pimco do the correct thing and buy debt that is explicitly backed by the U.S. government at way above risk free yields, they will pare back their purchases of things like Freddie and Fannie debt and more importantly, Freddie and Fannie Mortgage Backed Securities.  This of course will make mortgage spreads widen, thus jamming prospective home buyers and prospective refinancers.  Oh well.

The "LAW OF UNINTENDED CONSEQUENCES" STRIKES AGAIN!!

Comments

[Eric Salzman]

Fletch in the house!

[fletch]

agree rpb.. though if they smart, treasury should be lighting up the 5yr 10yr & 30yr bids in the biggest way they can. keep the hangers on (banks etc) hangin on to whatever remains of short liquidity as long as poss

[RPB]

This is simply amazing; in a bad way. We may actually see the Crowding Out Effect in practice. I do not think that anyone would have ever imagined we would be at the threshold to prove its existence. Wow. This may become really ugly.

It seems that banks are starting to ask new, scary questions with regards to credit lines. I believe they are no longer asking the question "If these firms had the proper access to credit would they return to profitability?" I believe some are now starting to contemplate "In this type of a toxic, red tide-esque financing environment, is this type of business financing obsolete?" As in, in the current economic environment can all types of firms that rely so heavily on short term financing survive? Couple this with the beginning of a vicious Crowding Out Effect spiral and we are twisting into a nightmare of immense proportions. I think its time to closey watch the Treasury auctions.

This sounds absolutely ludicrous. I hope I am way off. But this possible inflection point is very troubling.