More bank failures

September 29, 2008

Washington Mutual is dead already. It was one of the four major originators of option-adjustable mortgages, in which unpaid interest was added to principal; three of those originators are now dead. Wachovia is the remaining one, and it will surely disappear soon too.

In Europe, governments have lent Fortis about 11 billion euro to forestall a collapse, as it had great difficulty finding anyone to deal with. UK seized Bradford & Bingley Plc. Hypo Real Estate Holding AG was rescued by the German government and a group of private banks for 35 billion euros. Iceland has nationalised Glitnir Bank, though this nations banks have been having problems for a long while already.

Not much commentary is necessary on the above, save that the avalanche of bank failures will continue through the year end, and will intensify.

With respect to overnight libor:

Overnight USD Libor At 2.56% Vs 2.31% Friday
Overnight Sterling Libor At 5.26% Vs 5.00% Friday
Overnight Euro Libor At 3.71% Vs 4.06% Friday
3 month USD Libor Fixed At 3.88250% Vs 3.76188% Friday
3 month Sterling Libor Fixed At 6.26% Vs. 6.25% Friday
3 month Euro Libor At 5.22% Vs. 5.13% Friday

Overnight is holding below three percent for dollar so far, but the massive gap in three month libor over government bonds is extremely worrying. These numbers virtually guarantee further bank failures. Those who read this should understand that there’s no lending going on in tyhe interbank area, and as banks are exposed to risk of failure on any day because of the leveraged and confidence-based nature of their business, chance will dictate who will survive and who will not among weaker institutions.

In all these conditions, I believe it’s trivial to say that a global recession will be occurring during next year. IMF defines a global recession as growth below two and a half percent, but I think an actual global contraction is the likelier scenario, given how debt-laden, or overinvested all the economic actors are.

However, provided that this string of bank failures can be halted at some point, and panic can be prevented by governments, I still expect some sort of risk rally during October.


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