Wednesday, 22 October 2008

Bank Injections just the Beginning

I've noted over the past week the improvement in certain credit metrics such as the TED spread and LIBOR rates, however it is one thing to provide liquidity and guarantees to the system but quite another to get banks freely lending to corporates and houselholds.

The conventional wisdom of the treasury directly injecting capital into the "chosen ones" is that it will help shore up their capital bases and that would give them confidence to start lending to each other again and kickstart lending in the broader economy.

However, as Chris Whalen of Instituional Risk Analytics points out in the following interview, the losses coming down the pike will mean that the capital injections will be used just to absorb those losses and thus more funds will be needed to prop up these institutions in the coming months.

Who the hell is Chris Whalen and why should we believe him? Whalen is one of the few that went against the chorus of bullish cheerleaders and predicted the current crisis and the implosion of Freddie and Fannie. Much more credible than the pundits that never saw the current crisis coming and are now saying that the worst is over.