Con-tango

Lehman will be remembered

Henry M Paulson,  Jr
Secretary of the Treasury

A pivotal point, in my opinion, credit is tightening within a weak economy.

According to this Bloomberg note, today:

Sept. 15 (Bloomberg) — The Federal Reserve added $70
billion in reserves to the banking system, the most since the
September 2001 terrorist attacks, to keep bank borrowing costs
low after the bankruptcy of Leman Brothers Holdings Inc.    

Fed funds traded as high as 6 percent, or 4 percentage
points above the central bank’s target rate for overnight loans
between banks, according to ICAP Plc, the world’s largest inter-
dealer broker. The margin is the greatest since Bloomberg began
tracking the data in 1998. The rate dropped to as low as
1.75 percent after the Fed added the temporary reserves.    

Tap. Tap. Tap. Ta-do. Ta-da.

Ok. Things have changed, the Fed under Paulson’s negotiation umbrella, was not willing to hold the bag this time around, and Barclays walked away from Lehman.

And, the other banks said –No, thankyou, too.

As a consequence, share prices dropped (here and here), the USD tumbled, commodities zig-zagged with  gold up and oil down, and short term interest rates went sky high… as was expected under a Lehman demise which is potentially very contagious.

Things have changed because the Fed is tightening its purse, which foretells a dim future for companies, a scary and weak weak US economy to come, and bank worries are making them hoard cash to cover themselves from their own debts and client defaults.

So, loud and clear:

credit is tightening, and this is the stuff that generates depressions.

There, I said it. So, expect a lot more dominoes to drop.