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Strategies & Market Trends : John Pitera's Market Laboratory
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To: Joseph Silent who wrote (10309)10/17/2008 9:34:12 AM
From: Hawkmoon   of 33421
 
It seems to be the case that the national central bankers have distorted LIBOR by making it an unnecesary index.

That MIGHT be the case were the Fed injecting liquidity into the banks at an interest rate HIGHER than LIBOR, but that's not the case.

The TED spread is rising to new highs because, DESPITE the cheap money filling the coffers of banks from CBs, indicating hoarding of cash and unwillingness to trust one another. Too much supply (available cash) and reduced demand SHOULD result in a lowering of the LIBOR and the TED spread, but it's not. This indicates that building up war chests and restoring capital bases is paramount over lending to fellow banking institutions who might just wind up going BK and dissolution.

I found it interesting that the Treasury forced all of those banks to borrow money (in the form of preferred stock) at the rate of 5%, which presumably should motivate those banks to lend it out at even higher rates or negative returns. And that penalty will climb to 9% if they haven't derived sufficient profit from that money to pay it back within 5 years.

Over all, I'm not sure I support the author's contentions. Cheap money from the Fed should result in lowering LIBOR rates. So something else is clearly at work, and I suspect it's due to uncertainty over the solvency of many non-US banks, many of which are even more "geared" than were those 5 US investment banks. Deutche Bank, UBS, Barclays, and HSBC are a few examples of such banks, several of which have leverage approaching 60:1.

But I'm certainly open to other interpretations.

Hawk
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