It's still all about liquidity

Tony Jackson in the FT agrees with the analysis I tend to support that the current crisis is one primarily of liquidity not default. He points out:

The investment banks have been caught two ways. First, they have been hit by warehousing risk. In the absence of buyers, they are stuck with assets held for sale, such as leveraged loans and assets awaiting repackaging into asset-backed securities.

Second, they face the threat of having to take special purpose vehicles such as conduits back on to their balance sheets.

Add to that the warehousing problem and you have a big number – somewhere well north of $1,000bn globally, I would guess. That amounts to a balance sheet explosion.

For what this means, take the UK example. According to the Bank of England, total new funding required by UK banks to finance those assets could come to £170bn. That is equivalent to 14 per cent of the total stock of lending to UK corporates and consumers.

Self-evidently, this will cramp the banks’ ability to lend. It will also lead to further hoarding of liquidity to help with that funding, thus prolonging the liquidity crisis.

This is further exacerbated by the pro-cyclicality of regulatory capital requirements and most economic capital models. Corporates without long term funding will find life difficult going forward, and a lot of people will need a good measure of endurance to pass through this unscathed.

Meanwhile the bond insurer story moves on apace. Bloomberg reports that Fitch is considering downgrading one or more of them. The CDS market is taking this seriously: MBIA is now at 520 over and Ambac is over 700 over. The monolines guarantee $1T of bonds between them. Endurance, people, endurance.