America's Reign of Terror

by: John Jansen

My money market source is still as distressed as he has been the last several times we have chatted. He said that the recent quarter end has not brought relief and the market has much bigger preoccupations than that. He notes the 8 percent decline in financial company commercial paper in the most recent Federal Reserve data as an indications of the strains present in the system. I hate to be redundant, but each time I speak to the fellow he notes that the dislocations are as severe as any ever faced by a critical financial market.

He offers an example and I cannot use the names. This morning, a AAA British bank borrowed overnight at 75 basis points. I think overnight Libor was 2.68 percent, so approximately 200 basis points through Libor.

Separately, another British bank, not so favorably viewed by the investing public, with a AA1/AA rating, was forced to borrow overnight at 3.25 percent. There is a slight difference in the ratings, but the spread between those borrowers indicates the extent of the credit crunch and the loss of confidence in the system

In a previous post, I mentioned the T+650 basis point pricing of 5 year American Express credit. That would generally be considered a solid, stable American company with a deep and lasting franchise.

Markets get overdone and revolutions end in excess. In my opinion, the fact that American Express can trade that wide is the financial equivalent of the Reign of Terror during the French Revolution. Trust has been destroyed and devalued and it will take a very long time for it to revive itself.

I worry about our political class. This morning, I cast aspersions on the market savvy of Harry Reid who spoke cavalierly about a nearly bankrupt insurance company. That displays a real lack of understanding  of the consequences of loose lipped statements.

I would also note that John McCain demonstrated a similar lack of understanding of the situation during the debate last Friday. Twice during that debate he referred to the “fiscal crisis”. I gave him a pass the first time thinking that he misspoke. When he used the same phrasing the second time I was forced to conclude that he lacks an understanding of the complexity and nuances of the problem.

In the next debate, I would request that each candidate offer three names whom they consider potential candidates for Secretary of the Treasury in their new administration. That will be a crucial post in January and the person in that seat must understand the nuances of the markets.

I apologize for rambling.