September 30, 2008

In 2004, Goldman Sachs, along with 4 other brokers, received a waiver of the net capitalization rules, allowing these firms to dramatically exceed the 12-to-1 leverage rules.

WaMu's collapse heightened concern about the $122 billion of option ARMs sold by Wachovia, the No. 1 provider of such loans, according to Sean Ryan, an analyst at Sterne Agee & Leach Inc. in New York.

``The liquidity crunch is pushing a lot of banks to basically face credit issues faster than they otherwise might have,'' Ryan said. ``When it became obvious that Wachovia would have a difficult time justifying the value of their option ARMs, it became clear that their tangible equity could potentially be wiped out.''

But liquidity is based on the assumption that you can roll over your debts and when the fixed- income markets are closed, then your hand is forced.''

Sept. 30 (Bloomberg) -- The cost of borrowing in dollars overnight rose the most on record after the U.S. Congress rejected a $700 billion bank-rescue plan, putting an unprecedented squeeze on the global financial system.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers' Association said. The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, also increased to an all-time high.

``This is unheard of, the money markets should be the engine driving the financial system but they have broken down,'' said Kornelius Purps, a fixed-income strategist in Munich for UniCredit Markets and Investment Banking, a unit of Italy's largest lender. ``Any institution that hasn't completed its 2008 funding needs by now is going to be in very serious trouble. More banks are going to need to be bailed out.''

Money-market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. In Europe, banks borrowed dollars from the ECB at almost six times the Fed's benchmark interest rate today.

Commercial Paper
Libor, set by 16 banks including Citigroup Inc. and UBS AG in a daily survey by the BBA, is used to calculate rates on $360 trillion of financial products worldwide, from credit derivatives to home loans and company bonds.

As money-market rates rise, banks charge higher interest on loans to companies and consumers. U.S. securities firms and lenders alone have a record $871 billion of bonds maturing through 2009, according to JPMorgan Chase & Co.

Yields on overnight U.S. commercial paper jumped 171 basis points today to an eight-month high of 3.95 percent, according to data compiled by Bloomberg. Average rates on paper backed by assets such as credit cards and auto loans rose 229 basis points to 6.5 percent, the highest since 2001. Companies sell commercial paper to help pay for day-to-day expenses such as salaries and rent.

Funding constraints are being exacerbated as financial companies try to settle trades and buttress balance sheets over the quarter-end, balking at lending for more than a day.

September 29, 2008

Liquidity injection – $630B worldwide / $200B in US today

Raymond James to become holding company, as well.

On Monday, Citi bounced back in a shocking new role — financial savior — a status underscored by its move Monday to acquire Wachovia Corp.’s 3,300 branches.

The transaction was brokered by the federal government because it feared Wachovia would soon follow in the footsteps of Washington Mutual Inc., which failed last week.

The deal more than quadruples the size of Citi’s U.S. branch network and gives it another $500 billion in deposits, bringing Citi’s global total to $1.3 trillion.

For all of that Citi is paying precious little — $1 a share, just $2.16 billion in stock to Wachovia shareholders. The price reflects a 90% discount over where Wachovia’s shares closed on Friday. On the other hand Citi will take over $53 billion in Wachovia’s debt and will immediately write-off $30 billion in Wachovia’s mortgage-related assets upon closing the deal.

In addition, Citi is on the hook for another $12 billion of possible write-downs from Wachovia’s mortgage portfolio. Any losses beyond that, however, will be covered by the Federal Deposit Insurance Corp.

That could turn out to be a hefty burden for the government given that Wachovia’s $312 billion portfolio of mortgage-related assets is widely considered one of the sickest in banking.

The problem centers on Wachovia’s heavy exposure to ailing housing markets in Florida and California and its heavy amount of so-called Option ARM loans.

In exchange for protecting Citi from those possible future losses, the FDIC received $12 billion in preferred stock and warrants from the bank.

In addition to selling a stake to government, Citi said it is raising another $10 billion in fresh capital to cover potential losses by selling common stock. It will also cut its quarterly dividend in half to conserve cash, to 16 cents per share.

This marks the second time this year that Citi has slashed its dividend, and the latest capital-injections brings the total raised by Citi to over $70 billion this year.

The bank said it expects close fewer than 5% of its new branches, yet expects to generate cost savings of $2 billion. That number is equal to about 10% of Wachovia’s non-interest expenses last year, suggesting that there will be heavy job losses as a result of this merger.

Citi is not acquiring Wachovia’s A.G. Edwards retail brokerage unit or the Evergreen money management business. Presumably those assets will soon be put for auction or spun off to shareholders.

Commercial Loan Pricing Improves - Good Example From BBT: In case you missed it yesterday, BBT-BB&T Corp. closed a new facility with JOE-St. Joe Co. for $100 million at pricing of LIBOR+75 to LIBOR+175 depending on the level of total borrowing relative to asset values. This relationship was moved from WB-Wachovia and along the way the size of the credit line was cut in half and the pricing virtually doubled (i.e., the original terms with JOE disclosed in 2005 were $200 million at LIBOR+40 to LIBOR+100). We think this is an excellent example of how banks are able to win far better terms today than in prior years. While we hear anecdotal stories that pricing is improving on commercial credits, investors can point to this example as direct evidence.

September 23, 2008

Follow closely the TED Spread - TED spread

Initially, the TED spread was the difference between the interest rate for the three month U.S. Treasuries contract and three month Eurodollars contract as represented by the London Inter Bank Offered Rate (LIBOR). However, since the Chicago Mercantile Exchange dropped the T-bill futures, the TED spread is now calculated as the difference between the three month T-bill interest rate and three month LIBOR. The TED spread is a measure of liquidity and shows the degree to which banks are willing to lend money to one another.

The TED spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the LIBOR rate reflects the credit risk of lending to commercial banks. As the TED spread increases, the risk of default (also known as counterparty risk) is considered to be increasing, and investors will have a preference for safe investments. As the spread decreases, the risk of default is considered to be decreasing.[1]

TED is the acronym of T-Bill and ED, the ticker symbol for the Eurodollar futures contract. The size of the spread is usually denominated in basis points (bps), e.g. when T-Bills trade at 5.10% and ED trades at 5.50%, the TED spread is said to trade at 40bps. The value of the TED spread fluctuates over time but is often between 10 and 50 basis points (0.1% and 0.5%). A rising TED spread often foretells a downturn in the U.S. stock market as liquidity is withdrawn.

During 2007, the credit crunch, which many believe was caused by the U.S. subprime mortgage securities meltdown, ballooned the TED spread to a region of 150-200bps. On September 17, 2008, the record set after the Black Monday crash of 1987 was broken as the TED spread exceeded 300bps