Thursday, October 2, 2008

Don't Believe the Credit Crisis Is Real?


See this graph of the TED spread (explanation here). Via Brad DeLong.

Did Lagarde Save AIG?

Ambrose Evans-Pritchard claims that it was Christine Lagarde who beseeched Henry Paulson to save AIG in order to bail out European banks that would otherwise have gone down:

We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that it was for "regulatory capital relief rather than risk mitigation". In other words, it was underpinning a disguised extension of credit leverage. Its collapse would have set off a lending crunch across Europe as banking capital sank below water level.

Via Yves Smith. Await further developments on this score.

Carte Orange Goes, Navigo Comes

The venerable Carte Orange, dear to Métro riders for 33 years, will disappear in 2009. It has already been mostly supplanted by the Navigo, a card with an embedded chip rather than a ticket with a magnetic stripe. Plus ça change ... Of perhaps less nostalgic interest but greater world-historical moment: transporation will be free to recipients of "social minima." Promoting greater mobility among job-seekers is more important than it might seem as a means of attacking unemployment.

European Bank Guarantees

France and Germany disagree over how best to protect European banks, which are now under pressure in the global financial panic. Sarkozy has proposed (or maybe he hasn't proposed) an EU solution, a 300 billion-euro backstop for banks in difficulty. This is not a "bailout" like the proposed $700 billion American effort, in that it would not exchange cash equivalents for illiquid mortgage-backed securities. It would rather go to shore up banks endangered by a run of depositors of the sort described in an excellent article in today's Times on the threats to U.S. banks and money-market funds after the Lehman failure.

Although "greedy bankers" are a convenient target of public ire, it should be noted that even the most conservative and righteous of bankers is vulnerable to a run on his bank's deposits. In the current situation, as described in the Nocera article, sound institutions are threatened by the actions of "rational" depositors seeking even safer havens or a diversification of risk. In such circumstances an emergency backstop is a signal to restore confidence, not a payoff to cronies by a corrupt state.

That said, Sarkozy's EU-level approach may not be the best way of allocating liquidity. The FT prefers what it calls a "more surgical approach":

Rather than offering blanket guarantees, governments should take a more surgical approach. They should be prepared to inject equity into vulnerable institutions by buying stakes with preference shares, as the investor Warren Buffett has done with Goldman Sachs. These would pay a dividend at a punitive rate and would be combined with a sufficient degree of supervision of the management by the regulators to protect taxpayers’ interests.


This may be right, but then again a patchwork of national interventions may be less effective psychologically than a massive EU bank insurance fund--and we are really dealing here with depositor psychology in a panic, not with fine points of finance. So Sarkozy's activist instincts may be more pertinent in this crisis than Merkel's moralistic ones. The ad hoc solutions to the Fortis and Dexia crises have happily succeeded for the moment, but a bigger gun may soon be needed, and Sarkozy's plan shouldn't be dismissed out of hand, even though the French Finance Ministry already seems to be backpedaling in the face of strong German opposition.

ADDENDUM: Noriel Roubini, the pessimist's pessimist, expands on the doomsday scenario I alluded to above. Of course, if Roubini is right, neither Sarkozy's nor Merkel's approach will matter:

The next step of this panic could be the mother of all bank runs, i.e. a run on the trillion dollar-plus of the cross-border short-term interbank liabilities of the U.S. banking and financial system, as foreign banks start to worry about the safety of their liquid exposures to U.S. financial institutions. A silent cross-border bank run has already started, as foreign banks are worried about the solvency of U.S. banks and are starting to reduce their exposure. And if this run accelerates--as it may now--a total meltdown of the U.S. financial system could occur.


At least he's writing in the conditional.