Credit Front Lines Report

Will Aston-Reese, one of our two favorite credit market traders and frequent Planet Money guest (as well as All Things Considered guest) sent me a note this morning critiquing the positive news in a New York Times story. Translation follows.

I'm sure that you have both seen the NY Times by now. I had a message waiting for me this AM from a MM [Money Market] customer who told me that a stealth lender hit several very large Yankee banks late yesterday. The total was in the billions and the term was in the 3-4 months. I believe that this is more of the same, i.e., a "Bailout bank" lending to try to unfreeze the markets.

That fact aside, we have seen no spillover this AM in selling. Bids are creeping up and money is nowhere to be seen.

As for the Times article, despite the reports of money flows out there, I am not seeing the change in sentiment that Mr. Miller purports to see.

In normal times (in other words, before September 15th of this year), Will and his coworkers at Tradition Asiel Securities played an essential role in the global economy. When large banks need to borrow money for a few days or a few months, they would call Will and ask him to find someone to lend them a billion or two.

It might sound dramatic to those of us who have never handled a billion-dollar deal. But this was absolutely routine.

Then, on September 15th, a money market mutual fund, known as the Reserve Fund, lost money. These funds NEVER lose money. They are safe repositories of people's cash precisely because they only invest in super-safe assets, like loans to huge banks.

All of a sudden, loans to huge banks are NOT safe. Oh no. Lending stopped. That's the crisis we're in. At least one major part of it.

So, for the past five weeks, Will goes to work and watches, um, ... nothing. No lending. That is scary.

This note tells us that he heard that someone, somewhere lent a lot of money. The most money lent since September 15th. Some, like the NY Times, see this as a great thaw in the credit freeze up.

Will is saying: not so fast. This is a forced trade, using government funds, to try to stimulate the market.

This is not the heart of finance beating again, this is a massive shock to the heart to try to get it beating. And it didn't work.

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