What Would You Like?

I agree with the near universal view that Geithner’s speech lacked any kind of specificity. However, and take this for what its worth, but I’ve now read three big Wall Street economics reports on Geithner’s plan, and all were very positive. Its interesting to contrast that with how badly the market reacted. I think the market is in a “show me” mode, which is completely fair. But this plan is a hell of a better start than anything Paulson and Bush cooked up.

Flying a bit under the radar were three items the market seemed to be expecting (or hoping for) that it didn’t get: guarantee of intra-bank lending, forebearance on mark-to-market, and bringing the GSE’s on balance sheet.

First, the U.S. can’t by itself guarantee intra-bank transactions. It would take co-ordination with the ECB, Bank of England, Bank of Japan, etc. Intra-bank lending is an international game, and would thus require an international plan. Anyway, note that swap spreads moved drastically wider, 10bps or more on the front end. Obviously the intra-bank lending market wanted something from Geithner that he didn’t deliver.

And I don’t care what you think about mark-to-market rules. I’ve got my own misgivings, but now is not the time to make changes. The market needs more disclosure, not less! We need more trust, not less! If you take away the mark-to-market rules, the market won’t trust any bank assets at all. Not constructive.

Finally, I’m not sure that bringing the GSEs on balance sheet is really part of any stimulus plan, more of an accounting issue. So it still could happen. Anyway, Agency spreads are a good 10bps wider today. That’s obviously influenced by swap spreads as well.

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