It is now clear that the US financial system - and now even the system of
financing of the corporate sector - is now in cardiac arrest and at a risk of a
systemic financial meltdown. I don’t use these words lightly but at this point
we have reached the final 12th step of my February paper on “The
Risk of a Systemic Financial Meltdown: 12 Steps to a Financial Disaster”
(Step 9 or the collapse of the major broker dealers has already widely
occurred).
Yesterday Thursday a senior market practitioner in a major financial
institution wrote to me the following:
Situation Report: So far as I can tell by working the telephones this
morning:
- LIBOR bid only, no offer.
- Commercial paper market shut down, little trading and no issuance.
- Corporations have no access to long or short term credit markets --
hence they face massive rollover problems.
- Brokers are increasingly not dealing with each other.
- Even the inter-bank market is ceasing up.
This cannot continue for more than a few days. This is the economic
equivalent to cardiac arrest. Then we debated what is necessary to restart the
system.
I believe that the government will do another Hail Mary pass, with
massive guarantees to the short-term commercial credit system
and wide open short-term lending by the Fed (2 or 3 times expansion of the Fed
balance sheet). If done on a sufficient scale this action will probably work for
a while. But none of these financial measures affects the accelerating recession
-- which will in turn place more pressure on the financial sector.
Another senior professional in a major global financial institution wrote to
me:
Today, in our trading room, I could see the manifestations of a lending
freeze, and the funding hiatus for banks and companies, with libor bid only, the
commercial paper market closed in effect, and a scramble for cash - really
really scary.
Do you think this is treatable without a) a massive coordinated liquidity
boost and easing of monetary policy and b) widespread nationalisation of some
banks, gtess to others AND a good bank/bad bank policy where some get wiped
along with their investors? The Treasury Tarp plan is an irrelevance if we are
at a major funding crisis.
And to confirm the
near systemic collapse of the system of financing of both financial firms and
corporate firms Warren Buffett declared yesterday, as reported by
Bloomberg:
the U.S. economy is ``flat on the floor'' after a cardiac arrest as
companies struggle to secure funding and unemployment increases.
``In my adult lifetime I don't think I've ever seen people as fearful,
economically, as they are now,'' Buffett said today in an interview with Charlie
Rose to be broadcast tonight on PBS. ``The economy is going to be getting
worse for a while.' …The credit freeze is ``sucking blood'' from the U.S.
economy, Buffett said.
We are indeed at the cardiac arrest stage and at risk of the mother of all
bank and non-ban runs as:
- The run on the shadow banking system is accelerating as:
even the surviving major broker dealers (Morgan Stanley and Goldman Sachs) are
under severe pressure (Morgan losing over a third of its hedge funds clients);
the run on hedge funds is accelerating via massive redemptions and a roll-off of
their overnight repo lines; the money market funds are experiencing further
withdrawals in spite of government blanket guarantee.
- A silent
run on the commercial banks is underway. In Q2 of 2008 the FDIC
reported $4462bn insured domestic deposits out of $7036bn total domestic
deposits; thus, only 63% of domestic deposits are
insured. Thus $ 2574bn of deposits were not insured.
Given the risk that many banks – small, regional and national – may go bust (as
even large ones such as WaMu and Wachovia went recently bust) there is now a
silent run on parts of the banking system. Deposit insurance formally covers
only deposits up to $100000. Thus any individual, small or large business and/or
foreign investor or financial institution with more than $100000 in a FDIC
insured bank is now legitimately concerned about the safety of its deposits.
Even if as likely the deposit insurance limit will be temporarily raised to
$250000 by Congress there will still be a whopping $1.9 trillion of uninsured
deposits (or 73% of total deposits); thus, a huge mass of uninsured deposits
will remain at risk as even small businesses have usually more than $250K of
cash while medium sized and large firms as well as any domestic and foreign
financial institution or investor with exposure to US banks has average exposure
in the millions of dollars. Particularly at risk are the cross border mostly
short term interbank lines of US banks with their foreign counterparties that
are estimated to be close to $800 billion.
- A run on the short term liabilities of the corporate sector is also
underway as the commercial paper market has effectively shut down with
little trading and no issuance or rollover of such debt while corporations have
no access to long or short term credit markets and they are therefore facing
massive rollover problems (over $500 billion of rollover of maturing debts in
the next 12 months). Indeed, the market for commercial paper plummeted $94.9
billion to $1.6 trillion for the week ended Oct. 1 (and down over $200 billion
in the last three weeks). Especially banks and insurers were unable to find
buyers for the short-term debt: financial paper accounted for most of the
decline, plunging $64.9 billion, or 8.7 percent in the last week; but now even
non-financial corporations are also experiencing a severe roll-off in the CP
market. Discount rates for investment-grade non-financial commercial paper
spiked to 599bp for 60 day maturities. More companies are borrowing against or
tapping their revolving credit lines. This is largely due to the dislocation
caused in the money markets by the failure of Lehman and the subsequent
withdrawals from money market funds, which are some of the biggest providers of
liquidity in the short term funding/commercial paper. Even the largest
corporations are at severe stress: AT&T last week was forced to rely on
overnight funding for its treasury operations, as lenders were unwilling to
provide more long term financing due to fears in money market funds over
investor redemption. The CEO said “It’s loosened up a bit, but it’s
day-to-day right now. I mean literally it’s day-to-day in terms of what our
access to the capital markets looks like,’’ Things are much worse for
non-investment grade corporations and for small and medium sized businesses. As
reported today by Bloomberg:
Almost 100 U.S. corporate treasurers gathered for an emergency conference
call yesterday to warn each other that banks are using any excuse to charge more
to renew lines of credit. ``Capital is fleeing to safety,'' said Edward E.
Liebert, treasurer of Rohm & Haas
Co., who took part in the 90-minute call organized by the National Association of Corporate Treasurers.
``Interbank lending is not free-flowing any more,'' said Liebert, 56, chairman
of the Reston, Virginia-based trade group. One bank charged a participant in the
call 80 basis points to renew a routine $25 million credit line, according to
Liebert, who wouldn't identify the speaker or the company. Rohm & Haas,
based in Philadelphia and rated BBB by Standard & Poor's, is paying 8 basis
points for a $750 million revolving line of credit provided by 13 banks, the
treasurer said. A basis point is 0.01 percentage point. As the U.S. House of
Representatives prepares to vote on a $700 billion bailout bill passed by the
Senate, global credit markets are being squeezed by banks afraid to lend to each
other and to even some investment-grade corporate clients. Treasurers are
struggling to keep credit lines open so they can pay employees, fund pension
benefits and purchase raw materials. ``The banks are really starting to play
hardball,'' said Jeff Wallace, managing partner at Greenwich Treasury Advisors,
a financial consultant in Boulder, Colorado. ``They don't want to give out any
more money to people because they don't have enough capital”. Banks are
demanding renegotiation of interest charges or lending terms when ``routine''
amendments are requested on lines of credit, said Thomas
C. Deas Jr., treasurer of Philadelphia- based FMC Corp. and an
association board member.
- The money markets and interbank markets have shut down as
- despite the Senate passing the bail-out bill - yesterday USD
Overnight Libor was still at 268bp after reaching an all-time high of 6.88%; the
USD 3m Libor-OIS spread widened to record 270 basis points; EUR 3m LIBOR-OIS
spread is at record 130bp; the TED spread is at record 360bps (TED was 11bps one
month ago); Money and credit markets are dysfunctional also in emerging markets ; and agency bond
spreads are also at highs again.
So we are now facing:
- a silent run on the huge mass of uninsured deposits of the banking system
and even a run on some insured deposits are small depositors are scared;
- a run on most of the shadow banking system: over 300 non bank mortgage
lenders are now bust; the SIVs and conduits are now all bust; the five major
brokers dealers are now bust (Bear and Lehman) or still under severe stress even
after they have been converted into banks (Merrill, Morgan, Goldman); a run on
money market funds restrained only by a blanket government guarantee; a serious
run on hedge funds; a looming refinancing crisis for private equity firms and
LBOs);
- a run on the short term liabilities of the corporate sector as the
commercial paper market has totally frozen (and experiencing a roll-off) while
access to medium terms and long term financings for corporations is frozen at a
time when hundreds of billions of dollars of maturing debts need to be rolled
over;
- a total seizure of the interbank and money markets.
This is indeed a cardiac arrest for the shadow and non-shadow banking system
and for the system of financing of the corporate sector. The shutdown of
financing for the corporate system is particularly scary: solvent but illiquid
corporations that cannot roll over their maturing debt may now face massive
defaults due to this illiquidity. And if the financing of the corporate sectors
shuts down and remains shut down the risk of an economic collapse similar to the
Great Depression becomes highly likely.
So what needs to be done? Even several hundreds of billion dollars in
emergency liquidity support to the financial system by the Fed and other central
banks in the last week alone have not been enough to stop the seizure of
liquidity in interbank markets and the shut down of financing for the corporate
sector as counterparty risk is now extreme (no one trusts any more in this
crisis of confidence even the most reputable and trustworthy financial and
corporate counterparties).
Thus, emergency times where we are at risk of a systemic meltdown require
emergency measures. These include the following six ideas:
狗仔卡
发表于 2008-10-3 02:08 PM
