‘Experts’ Who Actually Know What Is Going On

Regular visitors to my site might think I am a cynic — and they would be right.

I’m sure many factors have helped to make me this way, including genetics and upbringing.

Yet I’m confident that my perspective has also been colored by the years I’ve spent listening to the nonsense coming out of the mouths of the so-called “smart money,” who like to give the impression that only they know what is going on and that they are fully on top of things.

As events of the past year have demonstrated, that representation, to put it mildly, is a load of codswallop.

But I would be remiss if I failed to point out that there are a small number of individuals and groups who have lived up to their billing as “experts.”

Among them is the Bank for International Settlements, which I have made reference to in earlier posts, including “Prescient, Again?” and “The Week’s Big Story.”

In “Money Market Strains to Continue ‘for Some Time,’ BIS Reports,” Bloomberg’s Gavin Finch details the latest call-it-as-they-see-it pronouncement from the central bankers’ central bank.

The disruption in the global money markets that pushed relative borrowing costs higher will probably persist “for some time” as financial institutions struggle to raise cash, according to the Bank for International Settlements.

The difference between what banks charge each other for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, “remains elevated,” the Basel, Switzerland-based BIS wrote in its quarterly report. The spread was 78 basis points on Aug. 29, compared with an average 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.

“The term structure of Libor-OIS spreads suggests the interbank market pressures are expected to continue for some time,” BIS analysts Ingo Fender and Peter Hordahl wrote in the report published today. “At the same time, bids for U.S. dollar funds at auctions conducted by the European Central Bank and Swiss National Bank continued to be high.”

Interest-rate derivatives imply that banks are becoming more hesitant to lend on speculation credit losses will increase as the global economic slowdown deepens. The concern is that money will become tighter through year-end because of the amount banks have to refinance in December. Stuart Thomson, a money manager in Glasgow at Resolution Investment Management Ltd., in an interview at the end of last month cited a figure of $88 billion.

Losses & Writedowns

Credit markets seized up a year ago after banks suddenly became wary of lending to each other because of mounting losses linked to the collapse of the U.S. subprime-mortgage market. Financial institutions have suffered over $500 billion of losses and writedowns since the start of 2007, according to data compiled by Bloomberg.

Nations accounting for half of the world’s economy face a recession, Binit Patel, an economist in London at Goldman Sachs Group Inc., said in an Aug. 21 report.

The premium banks charge for lending short-term cash may approach the record levels set last year, based on trading in the forward markets, where financial instruments are sold for future delivery. Back then, concern about the health of the banking system led investors to shun all but the safest government debt, sparking the biggest end-of-year rally for Treasuries since 2000.

Trust among banks remains low even after efforts by the Federal Reserve, ECB and Swiss National Bank to shore up the world’s biggest banks and promote lending.

Loan Facilities

In response to the continuing turmoil, the Fed said July 30 it would give securities dealers access to its existing loan facilities. It now also offers 84-day loans to commercial banks under the Term Auction Facility, known as TAF, in addition to 28- day loans. In total, the Fed has provided almost $1 trillion of emergency loans.

An arrangement with the Fed that allowed the ECB to offer dollar-denominated funding to the region’s banks was boosted to $55 billion from $50 billion.

The Fed’s most recent lending survey released Aug. 11 said that more banks tightened credit standards for consumers and business borrowers since April as defaults and delinquencies on home loans climbed.

The seizure in the credit markets and rise in short-term borrowing costs this year triggered questions over the validity of Libor, a benchmark administered by the London-based British Bankers’ Association and used to calculate rates on $360 trillion of financial products worldwide.

The BIS said in March some members of the BBA may have understated their borrowing costs to avoid being seen as having difficulty raising financing.

Formed in 1930, BIS monitors financial markets and regulates banks.

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