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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: glenn_a who wrote (90912)	1/28/2008 10:39:09 AM
From: Keith Feral	Read Replies (1) \| Respond to of 110194

Apart from the companies that went into BK, the banks have not suffered that big a a draw in capitalization. C is fine, WB is fine, and all the big cap banks are fine. They raised enough cash to maintain the same liquidity measurements they had a year ago. In fact, they have significantly deleveraged the balance sheets. I think the tradeoff between small dilution relative to the massive deleveraging is very constructive. However, I would totally oppose any argument that would suggest that lower rates are a problem with treasury yields so low. The spreads between FED funds and 4w treasuries keeps getting bigger, not smaller. The victims of the banking crisis are small cap companies that could not support their business models with their existing balance sheets like the mortgage reits and the smaller lenders that got carried away trying to sell more mortgages than they could support. They thought the market would keep buying their questionable ARM products. The FED waited long enough to cut rates to eliminate any chance of recovery for these undercapitalized companies. Now, their assets have been recycled through the rest of the banking system or systematically reduced in value. I think the FED engineered high rates to put the undercapitalized lenders out of business. I think their tight monetary policy over the past few years is self evident based on the credit spreads witnessed in every part of the market where short term rates were higher than long term rates. Now that the carnage has set forth, I think the FED has to return to a neutral monetary policy. It won't do a damn thing to help the companies that went out of business, but it will help consumers in the US afford better loans and stimulate the economy. Lower rates only reliquify the problem if Treasury yields were substantially higher than FED funds so that institutions could buy US treasury positions with cheap interest rates. However, FED funds are still at a premium, so I don't see any potential leverage issues being created by a flattening of the yield curve. It's healthy and natural part of the repair strategy, so that the real economy can benefit from more disposable income. Just to clarify the point, high interest rates are more relevant to the deleveraging in the system right now. If interest rates become lower than Treasury yields some day, we can resume the discussion about low interest rates and leverage. Right now, the condition just doesn't exist.