Moneymen may be hoping for some rest as an atrocious 2008 draws to a close, but for bank treasurers the “turn” is the most fretful time of year. They are often holed up in the office, frantically trying to balance the books as their colleagues head off to New Year’s Eve parties. This year is likely to be especially nerve-racking.
Liquidity always tightens in late December, when markets are closed and banks tidy up their balance-sheets. This year they will be more determined than ever to be well-groomed when the year-end accounting snapshot is taken.
The reluctance to part with cash is reflected in the London Interbank Offered Rate (LIBOR), which banks charge each other for loans. At the end of November one-month dollar LIBOR — ie, the rate on loans that stretched into January — jumped by half a percentage point, to 1.9 percent, after falling steadily for weeks.
An exacerbating factor this year is the demise of the investment banks. In past years, Wall Street firms would lend freely to the desperate in late December, gleefully puffing up their balance-sheets in return for juicy fees. They could do this because their fiscal years ended on November 30th, meaning they did not face the same end-of-year constraints as commercial banks.
No longer. Bear Stearns and Lehman Brothers, which provided an estimated $450 billion of stopgap funding at the end of 2007, are no more. Goldman Sachs and Morgan Stanley have turned themselves into banks (with a calendar fiscal year from 2009) and are under huge pressure to shrink their balance-sheets — all the more so for Goldman, which is expected to report its first quarterly loss of the crisis later this month. Brad Hintz of Alliance Bernstein says that what remains of the securities industry will provide at most $670 billion this year, one-third less than in 2007.
Nor does it help that lenders have become very choosy about collateral. In August 2007 a typical asset-backed security would secure a loan worth 95 percent of its face value; now it fetches a mere 30 percent. The amount on investment-grade corporate bonds has fallen from 97 percent to 85 percent. As for exotic mortgage-backed paper, forget it.
This leaves central banks having to step into the breach, as they did last December when interbank rates exploded. With their arsenal of newfangled liquidity facilities, the monetary authorities think they have the problem under control. “We’ve got into the habit of over-providing in the run-up to possible choke-points,” says an official.
Two of their most useful weapons are the Federal Reserve’s Term Auction Facility (TAF) and swap lines providing foreign central banks with dollars. These have already provided a combined $825 billion of over-the-turn funding. The latest $150 billion TAF auction was undersubscribed, suggesting that there is, for now, no panic among banks. But there is likely to be more jostling at the last two auctions of the year, on December 15th and 29th.
Even if no big firms are caught out on December 31st, it will be too early for their treasury teams to pop corks. Few believe credit markets will spring back to normal as 2009 dawns. Those with spare cash will remain wary of lending it until it is clearer how much capital they will need. That point is months, not weeks, away.