I'd reprint the article, but I didn't want to give Greenspan the press. Here's the link if you are interested, but I'll just paraphrase:
Greenspan's rudimentary thesis is thus: Global financial intermediation is broken (banks don't trust each other) because leverage banks were shockingly holding toxic sub prime securitizations. (What was shocking is that this toxic stuff was AAA!)
Banks wouldn't lend (they couldn't-they were insolvent) and credit financed economic activity was brought to a standstill, because bank book capital at 10% wasn't enough for market players. (What bank in the country has book capital of 10%? Tier 1 capital is reduced by accumulated losses. When these losses are hidden in Level 3 assets, a bank's capital is overstated. Banks didn't trust what they couldn't see, because every bank had problems they were trying to hide.)
So Greenspan tells us that the three-month LIBOR/Overnight Index Swap (OIS) dropped 200 hundred basis points last month with $250 billion injected from TARP. It was 10 basis points before the crisis, and up to 374 basis points when Lehman blew up. Thus if you inject $250 billion more, the spread comes down. (So give more money to the banks who lost the money in bad loans, and then they'll lend again, because right now they still don't have enough money to lend. They instead, are just parking their reserves at the Fed!)
Greenspan then backs this up with a chart that goes back 100 years on the capital of the banks. (So Greenspan's theory is that when the LIBOR/OIS swap comes down, the banking system is healthy. Before LIBOR, we had the prime rate. From 1955 to 1990, the spread between the Federal Funds rate and the prime rate was 1.33%. Since 1990, the spread has been fixed at 3%! What happened to this variability? The same will happen to the LIBOR/OIS spread.)
Capital ratios and LIBOR/OIS swaps are not what the system needs to be focused on. That's just Greenspan pimping more money to the banks. The markets just need the re-appearance of the "animal spirits." Disregard the action in oil and stocks today. It is wrong, and it means nothing. The animal spirits aren't in these markets; they've been in currencies and bonds, taking out the hedge funds that were short our paper!
However, as unappetizing that it is for me to say it, more money to the banks will help the system. My friend had a $700K jumbo at 6.625% with a major bank that was a participant in the TARP program. He refinanced. They gave him a 417K conforming mortgage, fixed rate at 4.625%, and the difference on a credit line, with a little extra room for his business, at a variable rate of 4.25%.
Those who say lower rates and lower oil prices won't help, are just plain wrong. My friend who refinanced will disagree. Watch the oil move at the end of the day tomorrow, when buyers actually have to take delivery. Today they puked up the last of the leveraged players in oil and in stocks.
Tomorrow the real buyers step in, and in both!
Just give us a gap down opening!
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