I've been told that, recently, the city of Madrid went out to the market in an auction for some new bonds - bonds that usually attract dozens of bids from banks and that should, even now, prove to be attractive as they are eligible as ECB collateral. 2 banks (two) showed up, and the city ended up paying interest margins 10 times higher than they usually do.
This cannot last for very long, there is going to be a major breakdown at some point. In the long run, we're all dead. John Maynard Keynes
Banks seek special funding costs clause Banks are looking at passing on higher funding costs to corporate borrowers by invoking an extraordinary clause in loan agreements triggered by market turmoil. A growing number of banks are concerned that Libor - a benchmark for interbank borrowing costs and the base for calculating the interest rate for many corporate loans - is no longer accurate in reflecting their actual funding costs. (...) In general, loan financings will allow a syndicate of lenders to switch the rate at which they lend to a company to a level that represents their true costs of funds, with the support of at least a third of the syndicate. But it requires banks to disclose what they believe their own cost of funding. However, individual banks are reluctant to complain that Libor rates are too low because it is tantamount to admitting other banks view them as a risky borrower. (...) Syndicating lending worldwide has collapsed as a result of the global financial crisis and there is evidence that where credit facilities are being provided they are much shorter term.
Banks are looking at passing on higher funding costs to corporate borrowers by invoking an extraordinary clause in loan agreements triggered by market turmoil.
A growing number of banks are concerned that Libor - a benchmark for interbank borrowing costs and the base for calculating the interest rate for many corporate loans - is no longer accurate in reflecting their actual funding costs.
(...)
In general, loan financings will allow a syndicate of lenders to switch the rate at which they lend to a company to a level that represents their true costs of funds, with the support of at least a third of the syndicate. But it requires banks to disclose what they believe their own cost of funding.
However, individual banks are reluctant to complain that Libor rates are too low because it is tantamount to admitting other banks view them as a risky borrower.
Syndicating lending worldwide has collapsed as a result of the global financial crisis and there is evidence that where credit facilities are being provided they are much shorter term.
These clauses used to be part of the "boiler plate" legal documentation of financings, ie standard wording that was there 'just in case', but that nobody worried about because it was never used. It was drafted initially in response to doller funding difficulties during one of the oil crises in the 70s, and almost never used since, but now it's at the heart of what we have to deal with. In the long run, we're all dead. John Maynard Keynes
Locally, Wall Street stalls funds for Maine's streets State hits surprising obstacles in trying to sell road bond: high rates, no buyers The state of Maine could not float a $50 million transportation bond this week because traders told officials there was "no market" at all for large financial transactions such as this one. The state hopes the national financial crisis will stabilize by next week, when it again tries to access capital, probably getting a higher interest rate than had been expected. "In 34 years I have never had a trader say, 'I can't give you a sale price. There is no market,' " said Maine Municipal Bond Bank Executive Director Robert Lenna, describing his efforts to sell the bond on Wall Street. A week ago, Lenna said, the interest rate for the AA-rated revenue bond would have been about 3.8 percent or 3.9 percent. But on Tuesday, short-term interest rates, a factor used to calculate interest rates for municipal bonds, soared as high as 9 percent and 10 percent, effectively shutting down market activity. "If there is any place the (national financial) crisis is affecting the citizens of Maine, it is here," Maine Treasurer David Lemoine said Wednesday.
State hits surprising obstacles in trying to sell road bond: high rates, no buyers
The state of Maine could not float a $50 million transportation bond this week because traders told officials there was "no market" at all for large financial transactions such as this one.
The state hopes the national financial crisis will stabilize by next week, when it again tries to access capital, probably getting a higher interest rate than had been expected.
"In 34 years I have never had a trader say, 'I can't give you a sale price. There is no market,' " said Maine Municipal Bond Bank Executive Director Robert Lenna, describing his efforts to sell the bond on Wall Street.
A week ago, Lenna said, the interest rate for the AA-rated revenue bond would have been about 3.8 percent or 3.9 percent. But on Tuesday, short-term interest rates, a factor used to calculate interest rates for municipal bonds, soared as high as 9 percent and 10 percent, effectively shutting down market activity.
"If there is any place the (national financial) crisis is affecting the citizens of Maine, it is here," Maine Treasurer David Lemoine said Wednesday.
There's plenty of money floating around. All that has to happen is to match sellers with buyers. It's a brand new thing called: A Market.
There's no reason there couldn't be an 'E-Bay' for bonds, bills, notes, and paper. Where the seller and buyers meet .. and bypass the intermediaries: banks, broker/dealers, & etc.
A better argument would be that this clause was not truly negotiated between the parties since the borrower had no choice but to accept the clause if it wanted it's loan. Again, usually the courts don't buy that argument unless it is a consumer loan with a borrower who had no real bargaining power. Contracts between non-consumers are usually assumed to be between parties with equal bargaining power (even though that isn't true). In this case I don't think any borrower had the power to bargain the clause away so maybe that argument would be useful where it usually isn't.
But this $700B 'bailout' is a huge mistake. As Jerome A Paris makes clear, our financial system is extraordinarily broken. There's also plenty of cash to take over these banks, but these bankers want government money because it comes on better terms than Warren Buffett's sweetheart deal. It should be obvious at this point that there's no urgent need for a deal. We're going to muddle along with a broken financial system for awhile, and the Bush administration is simply not acting like a meltdown is a realistic possibility. So why should we? Let the voters decide this one.
It should be obvious at this point that there's no urgent need for a deal. We're going to muddle along with a broken financial system for awhile, and the Bush administration is simply not acting like a meltdown is a realistic possibility. So why should we? Let the voters decide this one.
Is that your position?
I didn't interpret this comment of yours to mean that there is no need for SOME kind of action before January 20, 2009. Or that we can just "muddle along with a broken financial system" for a while without risking a meltdown.
Am I wrong?
We can't even be sure of the magnitude of the crisis outside finance (and in finance there MUST be a crisis -finance had got too big and needs to shrink). So what do we know? Well, a rotten plan is worse than no plan at all until January. Come January, we can hope for something half-decent, and we will know more so presumably it will be easier to target the funds. The price to pay is 3 more months of slow-motion crash. On the other hand, we can be pretty sure that no good plan will pass before at least the election. Definetely the current plans do not address the need for finance to have its crisis. Bailing them out so they stay at a similar level when they need to become at least 5 times smaller will not do.
So it seems reasonable to stand firm. Then I would say don't wait till January. Pass something truly designed to help (can you have an extraordinary session of Congress just for that?), and challenge Bush to veto it -if he even can. If he does, the plan takes shape in January anyway and he misses his last chance to leave a legacy that is not 100% awful.
I reckon that we will have a financial meltdown come what may (well, $700 billions won't be enough, and I don't reckon that the, at least, couple of trillions that would be needed to avoid it will be available), but probably no genuine meltdown before January in the rest of the economy. So if no action is the only alternative to making things worse, no action it should be.
Now, no meltdown in the rest of the economy won't prevent it from feeling awful -but it WAS awful even during the Bush "boom", so returning to June 2007 is not the solution.
If there must be one quick action, I'd go for stopping foreclosures, either by cancelling the rates spike for people living in the house, or simply by letting them stay in return for payment of what they can afford. Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
I think the fact that banks markets are absolutely frozen should be more widely publicised. Because the fact is - things CANNOT GET WORSE between banks. Behaviour re counterparty risk is already pretty much at the maximum it can be in terms of not doing business - ie bankruptcies won't change much in that respect. That fact should indeed allow lawmakers to say that taking a bit of time to design a real bailout would not be detrimental. I must admit I was pretty shocked to learnt that banks have not just limited lending to other banks, but that have just stopped lending to one another altogether. Things can't get any worse. Central banks are carrying the financial world over from day to day - it's not something viable over the long run, but it's not something that needs to be stopped on a specific date either.
That fact should indeed allow lawmakers to say that taking a bit of time to design a real bailout would not be detrimental.
I must admit I was pretty shocked to learnt that banks have not just limited lending to other banks, but that have just stopped lending to one another altogether. Things can't get any worse. Central banks are carrying the financial world over from day to day - it's not something viable over the long run, but it's not something that needs to be stopped on a specific date either.
I guess the question is - when does time cross over into the long run? Because if it isn't viable over the long run - the beginning of the long run is the specific date that it needs to stop.
I'd find it helpful to have some idea of how long you think this situation can be viable (not necessarily in terms of months but in terms of trigger events) and what happens if we get past that point without any plan in place.
