Why the Bailout Bill Alone Won’t Solve the Credit Crisis


I’m not surprised that three-month Libor ticked up again today, to 4.21%. TED’s now at 357bp (chart above), which is really bad, and it’s going up, not down. While the stock market has settled down after the chaos of Monday, the interbank market most emphatically has not. Even AT&T can’t borrow at terms longer than overnight: I’m getting almost nostalgic for the days when three-month money was considered short-term.

Will the bailout bill help bring liquidity back to the money markets in general? If it passes, will banks start lending 90-day funds to each other again? I fear the answer is no.

The problem is that no one knows the answers to two simple questions, even assuming the bailout passes the House:

  1. How long will it take for the $700 billion ($350 billion to start) to flow from the government into the financial system?
  2. How big of a spread will there be between the prices the government pays and today’s market prices? The difference is essentially the degree to which banks will be recapitalized, and therefore safer.

When I say that no one knows the answers, I mean that no one knows the answers — not even Hank Pauslon. Until the answers emerge, I doubt there will be much in the way of increased confidence in the banking system. And once the answers emerge, they might not be the answers that the markets would most like to see.

To put it another way: passage in the House is necessary for the banking system to return to some semblance of normality. But it’s not remotely sufficient.

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