Friday, November 18, 2011


The story does not change from day to day and the story is Euroland.  Mario Monti said all the right things the other day causing the yield on the Spanish 10 year to reach 6.98% and the Italian yield to follow right along.  Either no one believes the story or everyone is simply wait for concrete action with positive results.  Of course, if the ECB were to act in an unconstitutional manner and flood the zone with money...monetizing the debt is the phrase...then everyone would of course be happy but Sig. Draghi has indicated that that will not happen.  At the same time Frau Merkel has made it quite clear that neither she nor Germany thinks much of France's ever so reasonable idea of Germany covering everybody's butt through the issuance of Euro Bonds containing the joint and severable obligations of Deutschland and the 26 dwarfs.  And so we sit and hope that nothing bad happens in the next two or three weeks because if anything does, there will not be anybody around to deal with it as everyone will have run away and hid waiting for Christmas.  Oh yeah, there are elections in Spain over the weekend but everone knows that the ruling party is going to get thrashed so why bother.

Well, one reason is because of what our friend, Carter, brought up the other day, namly the LIBOR-OIS spread.  This is one of these indexs that made Michael Bloomberg a billionaire (and a crappy mayor); creat something that no one ever cared about (or knew about for that matter), stick it on the machine and convince the world that by following it, riches will come. Briefly, it is the difference in cost to a borrowing bank between borrowing at what we old folks used to call the Lombard Rate (ok, that's a fancy way of saying the Fed Funds Rate or borrowing from the central bank) and borrowing in the interbank market on a LIBOR basis plus spread.  As Carter correctly points out, the wider the spread the greater the perceived risk that exists in the interbank market.  The spread has widened to 40 basis points which is sort of around the level just when things started to go down the gurgle tube in 2007.

Now in the old days, there was sort of a touchy-feely way that folks got the message:  if a certain bank or groupe of banks began disappearing from the syndicate lending business you sort of got the idea that maybe it was because they couldn't make a profit  because of their funding costs.  There was always a LIBOR and then, for example,  a LIBOR for Japanese banks (slightly higher) and within that sub-set different levels of LIBOR for different banks.  Tokyo Ginko was always at the top because, well, because nobody ever believed that the Ministry of Finance would ever let a bank named after the capital city fail.  Silly us, but then again it was a simpler time.  Nobody ever gave a damn about the Lombard rate because nobody ever borrowed from the central bank: to do so meant that you were perceived to be in deep do-do and to carry the analogy forward, it was Seppuku time and in the funding centers of London and New York, seconds were hard to come by.  Oh yeah, the other way to figure things out was to call up your buddies at a couple of other institutions and ask what there view was on Last National of Boot Hill: oddly enough, the reads were pretty good.

Anyway, Carter gave me the idea to try to recapture those lost days of my youth so I put in a couple of calls to guys (and girls) I know who are still in the business in regard to the state of play in Euroland--no names just general view.  It aint good.  Lending has ground to a halt.  Cash is absolute king.  Long standing relationships are under severe pressure and liquidity is tighting on a daily basis.  What really troubles me is that Euroland banking is far different from our industry; despite the howls of the Occupy Wall Street mob, there is still a considerable seperation between government and the regulators   and the banks, whereas in France for example, the ultimate business plan for French institutions has always originated or has been approved in the Elysee Palace.  One knew where one stood within one's borders and across them as well.   Apparently, or so I am told, no one is sure anymore and everyone is scared.  No one speaks for the banks and no one speaks for Europe.  As I have said, this has always been about the banks because of the historical relationships and the nature of European banking.  I'm afraid this is a banking crisis such as we have never seen and from that ignorance a solution is difficult to fathom.  Let us see the the result of the Spanish election this weekend and the reactions to the same and take it from there.

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