The Credit Crisis is Over

The credit crisis is over. No seriously, it is:


Banking lending rates reached a historic low today. At a wimpy 0.48%, three-month Libor is at its lowest rate since at least 1986, when the British Bankers’ Association started keeping track. Compared to its post-Lehman Brothers peak of 4.8%, banks can now lend to each other at practically no cost. Credit, it would seem, is extremely liquid.

Remember the Libor/OIS spread? It’s the complicated ratio of interbank lending rates to overnight index swaps that Alan Greenspan famously called a “barometer of fears of bank insolvency.” It peaked at 3.6% basis points in October. Greenspan said credit would be in a “normal” state when the spread hit 0.25%. This morning, it shrank to 0.29%.

That reminds us of a key theme of last week’s Investment Symposium: Interbank credit is flowing, but that’s no longer the problem. It was once about what banks didn’t have — credit. Now it’s all about what they’ve got — bad assets… and there’s no three-month swap rate for those.

“Banks profited from lending to or servicing an overstretched consumer,” notes Dan Amoss. “Today, not only are their customer bases weak, but they all expanded fairly rapidly during the boom years and are now discovering just how bad their loans will be or how few customers will patronize them.

“To top it off, the U.S. government’s policies are acting to starve these companies and their customers even further by hogging most of the available savings to finance its deficit.

“Remain patient with your short positions. This rally will end soon enough, probably by the time the fourth branch of government — the mega banks — are done reporting their paper trading profits and we learn more about the bleak outlook for earnings in the real economy.”