“National Australia Bank (ASX:NAB) Feels Squeezed,” reports Rebecca Thurlow in the Wall Street Journal. “National Australia Bank Ltd., one of Australia’s largest financial institutions, has extended credit to funding affiliates in the latest sign of the credit crunch reaching around the globe.”
“The Melbourne-based bank has taken about 6 billion Australian dollars, or some US$5 billion, of loans onto its balance sheet after so-called conduits that securitise the mortgages called on standby credit facilities provided by the bank, according to bank officials. NAB also expects to have a total of about $11 billion in such loans on its balance sheet by the end of the month.”
You might call it the re-patriation of risk. Banks have been in the habit of moving loans off their balance sheet and onto an entity designed to re-sell those assets into the market of pension funds, hedge funds, or anyone gullible enough to buy them. A bank who moves risky loans off its balance sheet can then make more loans. And banks make money making loans. So there you go.
Now though, banks are being forced to own the loans they made. It’s like a drug lord who suddenly finds that he doesn’t have any more dealers to move product. Worse than that, he has to take all the drugs he’s been selling to the public. Banks are going to have trouble coming down from the high.
Any way you look at it, the cost of money is going up. The market price of money is actually much higher than what central banks have targeted. Central banks would like lenders to continue with their loose morals. But banks are charging each other higher interest on short-term loans.
It’s more than you probably want to know, but the rate banks charge each other for loans of three months or less is called the London interbank offered rate, or LIBOR (Lee-bore). LIBOR reached 5.72% yesterday, its highest rate since January of 2001. “The crisis is still pretty bad,’ E. Craig Coats Jr. told Bloomberg. Coats, who’s the head of fixed income in New York at Keefe Bruyette & Woods Inc. added this ray of despair: “We are a long way from being out of the woods”.
Did someone say Dante?
Nel mezzo del cammin di nostra vita
mi ritrovai per una selva oscura,
ché la diritta via era smarrita.
In the middle of the road of my life
I awoke in the dark wood
where the true way was wholly lost
Markets and Money