Banks Hit With Surging Credit Costs

Twenty-five major banks are paying an approximate $300 million in interest rate charges on $70 billion worth of bonds issued since July, when the current market turbulence began, according to Dealogic. About $20 billion in bank redemptions that must be refinanced with new bonds or loans is due this month. "The uncertainty, the volatility and the low risk appetite means banks have to pay more to get their bonds away," said Willem Sels, head of credit strategy at Dresdner Kleinwort. In addition to rising costs in the bond market, banks are faced with millions in extra charges that must be paid to borrow in the shorter-term money markets, where rates have shot up since July. The postponement of buyout deals has also left leveraged loans on balance sheets that are cutting into earnings. Goldman, Morgan Stanley, Merrill Lynch, Lehman and Bear Stearns will have no choice but to fund $75 billion of loan commitments to LBOs at a loss, according to Citigroup analyst Prashant Bhatia. "They have been, to their ruin in some cases, borrowing short and investing long," said Waddell & Reed fixed-income money manager Jim Cusser. "Now they're regretting that, because what they put their money into isn't panning out." Bloomberg notes that the bond rally isn't helping Wall Street: Lehman has higher borrowing costs now than it did in June despite the sharpest drop in quarterly yields since 2002, and Bear Stearns' 10-year bonds are trading at a discount to Colombian bonds, which are "barely investment grade."

Sources: Bloomberg, Financial Times
Commentary: Credit Concerns Haven't Gone Away • Bond Management and Overall Market Volatility • Commercial Paper Slump Deepens, T-Bill Yields Fall
Stocks/ETFs to watch: C, GS, LEH, MER, MS. ETFs: FDL, IAI, KCE, VFH, PRFF

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