Saturday, September 20, 2008
I think the Regional Banks are next. They are so dependent on big broker dealers like Lehman, Merril, etc. and liquidity in the money market. During the last couple decades they've flourished because interest rates were so low, and their was so much cash in the financial system. This allowed them to make big spreads on the difference between their borrowing rates and lending rates. Considering that the Ted Spread and Libor (London Inter Bank Overnight Rate) has spiked the last few days so dramatically (from 2% to 6% for libor) its will leave regional banks unable to cover deposit withdraws. The fed fund rate is low, but the actual cost of borrowing between banks has skyrocketed as their is no trust within the financial system. Banks have to borrow between one another to cover cash deficits and effectively use surpluses. I suspect a run on the regional banks as the main street phase of this problem. Regional banks also became very dependent on securitized lending. WAMU, National City Corp, etc. aggressively brokered auto, student, and housing loans regardless of the credit ratings of the borrowers. They made huge origination fees, closing fees, etc. The volume in the mortgage business was stunning. The loans were sold to big broker dealers like Lehman, Goldman, etc. who partitioned and put the paper back into the money market (pension funds, money market funds, and insurance companies bought it all up). The Fed is trying to inject the liquidity back (at the expense of the dollar). Regionals have been perceived as not particularly at risk considering that they have millions of customer deposits. A public run on the bank, not an inter-bank run will probably be next. There are Exchange Traded Funds that allow shorting of the regional indices.