Credit Spreads Blown Out, Worse Than Last Thursday

Credit Spreads Blown Out, Worse Than Last Thursday

With Congress and White House/Tsy teed up for a $700bln bank rescue package (trust me it is in the bag, all the hearings are for show back home) and Warren Buffet putting down $5bln on Goldman preferred, credit is blowing out today, worse than last Thursday.
This is not because the credit market thinks Congress will block the Treasury bill. No the US government response exposed the global nature of the problem.
At first the package was for just US financial firms. Then the phone started ringing at the Fed and Tsy and it was all the foreign banks with US presence saying what about us?
I suspect that Fed and Tsy felt that foreign banks had done the bulk of their write downs and this rescue exposed a new worst of all possible world outcomes…they have written off very little.
Why else would US banks still not want to lend or trade with each other for anything beyond overnight 13 months into massive liquidity injections from the Fed (and other central banks – access to ECB in European banking operations)?
Banks are hoarding cash. Firms are starting to hoard cash. How long before people start hoarding cash?

The credit market is not quaking today because it is worried Congress may not pass the Paulson-Bush bailout plan. I think most see the bill passing in a revised form with much of the meat on the bones from the initial bill.
What credit markets are saying is this $700bln is not enough…where is the EU $700bln bailout fund?
Where is the BOJ $10bln bailout fund?

G7 needs to hold an emergency conference call and get at the very least verbal commitment to do what the Treasury is trying to do and will have in place by Friday or Saturday and pronto.
Even if European Union is unable to respond quickly enough and requires individual state responses at the very least a public political commitment to the process is a necessary if not sufficient condition.
And as a temporary stop gap measure I suggest the ECB commit its currency reserves (over $200bln) to set up a toxic waste fund immediately with a temporary lifespan until the governments of the Euro Zone and EU come up with the funds and pay the ECB back for whatever reserves are used to buy bad assets.

The banking system is badly broken and stocks and the dollar are not worth looking at for a read on how badly banks are no broken.

David Gilmore

 

They probably do now, but I wonder where they are safer;
under the mattress or in a US bank...