This Is Not Financial Meltdown

Is this the low point of the crisis so far? From the stock market's point of view, yes, it is. And the numbers coming out of the Treasury market would certainly seem to imply a flight to quality of unprecedented magnitude. Put plunging credit markets together with imploding banks, and there's little doubt about what results: a soaring TED spread, right?

Wrong.

The TED spread today is 213bp -- more or less exactly where it's been for the past few weeks. Which says to me that for all that financial stocks are being crushed, this is no reprise of the financial crisis we saw in the wake of Lehman's collapse. Rather, it's an old-fashioned economic crisis, which severely erodes the equity of leveraged banks, but where money still flows and even the occasional IPO can get away if it's priced at a discount. Or, to put it another way: It's a bear market, not a financial meltdown. Which might be little solace to anybody whose stocks have been crushed of later, but which might help reassure policymakers at least a little.

Banks' capital structures can cope with this: Once the common is eroded, the bank belongs to its preferred stockholders. It's not the end of the world if Citi stock goes to zero, and the Fed has made it very clear that Citi's senior creditors are going to remain whole. This is not a great environment for a firm's stock to be wiped out, but with the help of Treasury, it might not even need any new money to be able to continue operating indefinitely. Assuming it doesn't sell itself first, of course.

Disclosure: No positions.

Comments

[JasonC:]

Nothing is being wiped out except some panicking idiots' remaining sanity. All the financials are screaming buys at these levels.

2008 Nov 21 12:32 PM

[Socialism c...:]

Sorry Jason...we're not done yet. The dollar is heading for a total dive-bomb. You think the job losses have had their effects yet? Do you think the cuts are done? Stay tuned...we haven't seen anything yet!

2008 Nov 21 01:35 PM

[RDKaser:]

Your explanation is plausible only to the extent the TED spread is a trustworthy number. They've already been caught blatantly lying about LIBOR once, so why assume it's trustworthy now? (especially with so much on the line.)

IMO it's more likely LIBOR is (still) a lie and things aren't really as "good" as they seem. Remember, there's no way to independently verify the LIBOR calculation... it's a "trust me, I'm really telling you the truth" number. Sorry guys, I don't trust you.

Take ALL data like this with a grain of salt.

2008 Nov 22 08:20 AM

[jepittman:]

I am inclined to agree with the author. The Fed can guarantee the continued functioning of a bank by providing virtually unlimited access to short term capital. This they will do because their first and primary mandate is to defend the banking system. The stock price is a function of supply and demand for the shares at a given time. At the moment panicked longs and jubilent shorts operating without rules or limits have driven the price down to what are IMO unsustainable levels. There may be a giant trap being laid for the shortsellers.

2008 Nov 22 09:36 AM

[capt Brian:]

Oh this is too simple, we are in a bear market, so why fight it. BUT...do you think people are going to stop buying things? I don't think so. Sure, in Detroit while they figure out that the bars income is going to drop some, and Starbucks may close a few more locations,but people will eat(need farms and trucks to bring it), sleep somewhere, (need heating oil) , and food clothing and shelter will be purchased at some level, causing trading of money from / to people. So only question is when do we start buying toys again. Simple, when people get back to work, and quit crying. Many have been paid over $70 bucks an hour to put a bolt in a bumper. Where is all the money, surely did not go to savings. Where is the equity in their homes they have been paying on all these years when times were good. I'll tell you where it is. It went to 2nd mtgs to pay for toys, (suv's vacations, etc) They did not save first like I did. Now when the @#$% hits the fan, prudent people can fall back on savings and their plan for hard times. Whereas the others who thought the cornucopia would never stop pouring out goodies got a wake up call. Welcome to thinking about a savings plan for next time. Gets clear doesn't it?

2008 Nov 22 09:57 AM

[PainfullyAware:]

Go for it JasonC - buy away !!!

I am considering a larger scope of data and much conflicting opinion. Debate is the distillation of reality. However Reality Will Be Reality Whether Believed In Or Not.

For the most part the indicators are skewed by those with means and incentive to misrepresent them as well as the psychology of panic and deleveraging.

I am skeptical that the system will survive in its current form; but humanity has proven itself to be resilient before. Although, I would venture to say that no one living has ever lived through such an event nor were there ever so much information to consider as it happed. Truly Interesting Times.

If I remember correctly Henry Ford was quoted in the Great Depression as stating in condescending tone -"Why don't those people just get jobs". This is the American example of Marie Antoinette without the consequences. I fear that another of these moments is approaching.

Apparently our government does as well. As of Oct 1, 2008 3RD Armor in the Pacific Northwest and 3RD infantry in Georgia have the mission of Riot Control. Other troops such as the 82nd Airborne have participated in the recent drills and training.

Prepare for the worst, Pray for the best.

2008 Nov 23 01:40 AM