When does the seamless takeover of a bank with $300 billion (Rs13.92 trillion) in assets provide almost no comfort to worried investors? When the financial world is in a real mess. This Friday, for example.
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In less strained times, investors would be cheered to see the US regulators and JPMorgan Chase and Co. keep Washington Mutual Inc.’s operations going without a break. But they had to chew over were two other larger pieces of news.
The first is the inability of US politicians to agree on Henry Paulson’s $700 billion bailout plan. Talks broke up acrimoniously on Thursday night. It’s not clear that the treasury secretary’s scheme would actually stabilize house prices or bank balance sheets, but the failure to do anything would be a big blow to an already fragile investor confidence. Even a weak compromise—the most likely outcome—might do little to bolster spirits.
The second piece of bad news is actual, not potential. Confidence in the money markets has evaporated. The spread between three-month interbank dollar lending rates and the comparable yield of government debt was a yawning 275 basis points, or 2.75 percentage points, on Friday morning—compared with less than 20 basis points in good times. Worse, funds were hardly available even at that elevated price.
During the credit boom, many borrowers happily financed long-term assets with short-term funding from the open market. The savings—relative to dealing with banks, or with securing long-term funding—were alluring. The markets have been seizing up off and on for the last year. But after the failure of Lehman Brothers Holdings Inc., those who have funds are keeping them and those who need them are desperate.
Government intervention: The US Federal Reserve building in Washington, DC. On Friday, the Fed announced an additional $13 bn to the $277 bn already made available to foreign central banks. Karen Bleier / AFP
The world’s central banks, whose coordination has been impeccable, are trying to fill the gap. The US Federal Reserve, in an early morning press release from Washington on Friday, announced the addition of $13 billion to the $277 billion already made available to foreign central banks.
The European Central Bank and the Bank of England (BoE) have been offering overnight dollar funding, but will now offer one-week loans—which will provide banks with much-needed funds at the end of the third quarter. BoE, which has been the most cautious of the major central banks, will also offer a chunky £40 billion (Rs3.42 trillion) to banks through 15 January, for the sake of a smooth year-end.
Central banks are supposed to be the hub of the wheel of short-term finance, but the banks on the rim are expected to take all the financial strain. In the crisis though, the rim is thinning and the spokes—the lines from banks to central banks—are getting thick with risky collateral.
US politicians may be balking at a direct taxpayer bailout, but one way or another, the authorities will end up taking on the costs of the credit mess.