I thought this was good article from Barrons. This little crisis will put BB to the test and allow him to show his true colors. Right now the Fed Funds Futures are putting .25 rate by the end of this year at 100%.
Will Bernanke Bail Out This Credit Meltdown?
“THE TURNING POINT IN LEVERAGED FINANCE HAS BEEN reached,” junk-bond guru Martin Fridson declared four weeks ago in the print version of Up and Down Wall Street (“Dear Lord!” July 2). Any doubters of that prophesy were disabused by Thursday’s rout in the stock market that had the Dow Jones Industrial Average down by more than 400 points at its low.
Since then, the cost of credit has skyrocketed, imperiling the raft of corporate buyouts that have fueled the bull market. And Business Week’s cover story of Feb. 19 — “It’s a Low, Low, Low-Rate World: Money is cheap. And some experts say it could stay that way for years” — is looking like a worthy successor to its infamous “Death of Equities” cover of 1979.
The entire spectrum of credit was being repriced, with far greater premiums to compensate for risk that had been cavalierly accepted by lenders and investors just a few short weeks ago. The notorious ABX.HE — the index of credit default swaps on asset-backed securities, the main hedging vehicle for subprime risk — not surprisingly took another tumble amid unrelenting bad news from home builders and in home sales data. And junk bonds had their worst day since the collapse of WorldCom in 2002, according to KDP Investment Advisors.
But the more important indicator has been the widening of spreads on corporate loans, the lifeblood of the deal business, evident in a further deterioration in the LCDX, an index which reflects credit default swaps (derivatives based on the cost of insuring against default on loans.) The LCDX hit another new low in its young life, resulting in the cost of default insurance rising to 325.5 basis points (3.255 percentage points).
That represents a doubling in the risk premium on corporate loans since Fridson made his prescient statement at the end of June, and triple where it started in May. Wall Street firms and banks that made commitments to lend to private-equity firms at the previously narrow spreads may now be holding the bag.
As a result, the cost of insuring Wall Street firms’ credit soared Thursday, Dow Jones Newswires reports. For instance, the cost of insuring $10 million of Bear Stearns debt soared to $105,000 from $83,500, a huge increase in a single day. Indeed, the credit derivatives market is pricing Bear and Lehman Brothers investment-grade debt as junk, the DJ story adds.
That’s set off a chain reaction throughout the markets. “Large banks, choking on LBO bridge debt that they cannot distribute, have likely tapped all their traders and risk takers to lower any and all risk positions and refrain from taking on any more, regardless of level,” writes William Cunningham, head of global fixed-income research for State Street Global Markets.
