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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: elmatador who wrote (49636)	5/7/2004 2:12:00 AM
From: energyplay	Read Replies (2) \| Respond to of 74559

1) There is an expectation that capital will become more expensive. 2) Conserving capital makes ratios look better. 3) Doing rapid build outs with new technology sometimes requires big chunks to do in a compressed time frame. It's nice to have this on the balance sheet. 4) Having a very strong balance sheet can you a credit rating like AA or AAA, which meqans you can get very cheap money from money market funds.

To: elmatador who wrote (49636)	5/7/2004 2:46:47 AM
From: Taikun	Read Replies (3) \| Respond to of 74559

<What is lacking is business worth the risk to loan money to. EVEN AT THE LOW INTEREST RATES WE HAVE TODAY!!!> That indeed is the issue. Banks are extracting huge margins. I'm not sure about business loans but look at 30yr fixed rate mortgages at 6.25%. With the overnight rate at 1% that is 5.25%, or 525bp profit for the banks. This is huge and is why long term mortgage rates, for example, are unlikely to move lockstep with overnight rates. The long term trend line is probably around 300bp. Why the huge spread? This is because the marginal lenders, the ones the banks haven't gotten to yet, are far less creditworthy than the customers they landed earlier on. So, this is a risk premium for the increased possibility of default, in my opinion. The overnight rate is low, yes, but bank margins are well above long term trend, and the market can thus handle a 2% overnight rate without much difficulty, in my opinion. Bill Gross of Pimco thinks so as well. Capital is not cheap relative to the nominal and real interest rate, which is related to the lower rate of growth. When growth prospects slow companies do not want to give such high margins to banks.