Banks At Serious and Immediate Risk, Again

Despite the shot of confidence provided by the recapitalization program in mid-October, equity prices and CDS spreads indicate investors are getting nervous about banks again – and some may even be betting that they will fail, or at that equity holders will be wiped out. As the recession deepens, banks’ assets (not only mortgage-backed securities, but loans in all forms) are falling in value, increasing the chance that the government will need to step in again with more capital. Peter and Simon have a guest post at Real Time Economics (WSJ) on the options – none of them pretty – that the government has.

6 thoughts on “Banks At Serious and Immediate Risk, Again

  1. What is meant by Simon’s reference that Cii has “substantial off-balance-sheet liabilities”? This sounds suspiciously like running two sets of books. Please explain.

  2. There is nothing illegal going here (or not necessarily). Banks have various techniques for keeping liabilities off their balance sheet. One is to create structured investment vehicles that are, technically, separate entities in which the bank only own part of the equity. In practice, investors assume that the bank stands behind the SIV, and when it fails the bank bails it out. (I believe Citi just moved its last SIVs onto its balance sheet.) Similarly, some derivative positions are not kept on the balance sheet.

  3. How can the gov’t expect to be able to repeatedly step in with more money? How much more money is there? I mean, we’re already $10T in debt; are we not already at the point of simply printing money and hoping that it sticks?

    I’m not trying to by flippant here, I really do not understand where all of this new capital is going to come from, and I don’t buy for a minute the idea that the U.S. government can reasonably expect to borrow this amount from ANYONE, and if they do, I don’t think we’ll ever see it come back in any way, shape, or form.

    I mean, look, if $700B isn’t enough, then what is?

  4. In fact, right now, the government can borrow pretty much as much money as it wants, because so many people and institutions are dumping securities with any hint of risk and buying Treasuries instead. I believe the yield on 3-month T-bills right now is right about zero (last I looked, yesterday, it was 0.01%), which means we can borrow money for free.

    Granted, this situation cannot last indefinitely. There is a legitimate concern that at some point the volume of debt, and reduced panic, will make it harder for the government to raise money at reasonable interest rates. However – to simplify greatly – many people think that our long-term ability to raise money requires not wrecking the economy, and hence it makes sense to borrow. Still, though, there is no way that every struggling institution can be bailed out, so Treasury will have to make some choices.

Comments are closed.