Important Inter-Bank Lending Rate Goes in Wrong Direction. TED Spreads Too.

A bit of disconcerting data this morning; Three-Month Libor, the rate banks lend to each other on a unsecured basis, jumped nine basis points to 2.24%.  This is the second daily increase after a string of twenty-three consecutive days of decline.  Additionally "TED Spreads", the difference between three-month Libor and three-month Treasury bills increased six basis points, breaching 200 basis points (2%) for the first time this week.

There is a lot of nervousness in the money markets again over the health of key players and the perceived loss of focus from the TARP.  Talking with our friends on bank funding desks, fear is starting to return to an area that just about ten days ago seemed to be stabilizing itself.  Citigroup seems to be rudderless right now as they prepare for a onslaught of consumer credit defaults.  Goldman Sachs equity has taken a dreadful pounding the last two weeks, which is not comforting to the money markets.  After all, once you've been glorified as the bell-weather for greatness, showing the world that you can be just as dopey as everyone else isn't a confidence builder.  GE is also showing itself to be just another over-leveraged entity that can't delever quick enough and needs to be hooked up to the Federal Reserve life-support system.  Another myth dispelled by cold reality.

I also strongly believe that AIG's ability to completely jerk the Fed and Treasury around late last week did a lot to damage those institutions credibility.  The view from inside "The Monkey Cage" is that AIG has gained the upper hand in this relationship and is now embarrassing the Fed.  I believe that letting AIG live may actually turn into more of a systemic risk than if they died.  The Fed and Treasury, in my opinion, revived their credibility in October with the number of bold moves that stabilized the banking system.  AIG, with all their hubris and obnoxiousness is degrading that hard earned credibility.  The Fed loses it again and I have a hard time seeing them get it back.  I strongly believe that psychology is a VERY powerful factor in determining if and when we come out of this mess.  AIG is working against us.  It's time for them to go.

Another thing that is working against us is the media and congresses lack of understanding of what the TARP was supposed to be about.  And I will not give Treasury a pass here because they have done a horrible job at getting the right message out.  Secretary Paulson's appointment of Neel Kashkari, a thirty-five year old investment banker, to be the head of the TARP has been a disaster.  It's nothing against Mr. Kashkari, but this is not his game.  Anyway, last night I watched "The Jim Lehrer News Hour".  Mr. Lehrer had Mr. Paulson on and Lehrer just kept pounding away at Paulson,(paraphrasing)

Lehrer: "We gave you $700 billion to fix this mess, how come the economy is getting worse not better?"

Paulson: "The mission of the TARP was to stabilize the banking system.  The system had reached the tipping point and we kept it from failing.  That's what the TARP was and is for."

Lehrer: "Well, what is the difference between the economy and the banking system?  Aren't they the same?  Does the public know there's a difference?  Is there any difference?"

Paulson: "Oh, if the banking system failed they would know the difference."

Lehrer: "Ok, but how come things keep getting worse when we gave you all this money?"

And on and on it went.  Treasury has done a crappy job communicating the effect of what a collapse of the banking system would have on the American people, period.  Honestly, I KNOW I could have done a better job and I'm free if they want to give me a call!  Additionally, politicians don't seem to have done any homework over the last few weeks about the financial system and the economy and are fanning the flames of despair.  Yesterday, Senator Chris Dodd thundered that they gave the banks billions and they better start making loans.  Who should they lend to Senator?  Lets face it, good credits (commercial and consumer) are cutting back on their debt, not increasing it.  The only people who need credit right now are people (and companies like our friends in Detroit) that don't meet the underwriting standards the banks have just retrieved from the dumpster that they were thrown in sometime around 2003.  The capital was not injected to run around the country like a drunken sailor handing out money to anyone who asked.  The capital was injected to shore some banks up against oncoming losses, allow some banks to use capital to buy weak banks and write down the weak bank's bad assets, attract private capital to TARP participants, and allow the banking system to stabilize and begin to heal itself.  The public could have been enlightened (Congress is a lost cause!) to this many many times over in the last month.  Treasury and the Fed fell down on the job when it comes to this and now we are paying the price.

Well that's enough of that.  There's more about Treasury's change of focus with regard to the second half of TARP that has given the impression that Treasury is just flailing about.  Personally, I believe they are doing the right thing on that.  Here's a link to what we said about that yesterday TARP Changes Focus

Be lucky today.

Comments

[eric]

Interesting nonetheless alcolol (great screen name btw!

[fletch]

amen rpb, term limits and line item veto. simple solutions to get some accountability back quickly in dc

[alcoLOLic]

oh wait, we are talking 3-month LIBOR. not overnight. Either way, I wonder if fed fund effectives are more elevated over a weekend than they are Mon-Thurs.

[alcoLOLic]

Do you think LIBOR is up because it is the weekend? I mean, look at the previous fails... The Lehman fail was over the weekend, Wacho almost failed over a weekend, IndyMac went down on a weekend. There is a lot more time for a counterparty to file bankruptcy when lending overnight funds for a whole weekend, so i can understand the lenders asking for higher rates on Fridays. Let's see if this becomes a trend.

[eric]

I can always hope! I wonder if they (Congress as a body) were always such useless bags of shyt?

[RPB]

Eric, are you actually expecting our elected representatives to display leadership? Term limits for these spineless career politicians has been a long time in coming.