Deals Dry Up... No Recovery in Sight

I have done my basic math and based on most of what I have learned all current government attempts to rescue the financial markets will have run their course by around April 2009. The interesting thing about the new Treasury plan is the move from a couple billion dollars of debt market support to a Trillion dollars in debt market support.

Given that in a healthy debt market about $50 billion a month in various consumer debt offerings would be needed, I really don't know how the financial system has avoided complete implosion to this date because this market is virtually non existent at the moment. The caveat in the Trillion dollar debt market plan is this also includes mortgage backed securities leaving much to other areas of consumer debt issuance.

The inquires by various senators holding up loan documents and lines of credit by borrowers in their respective jurisdictions asking banking CEO's why their banks have called loans and refused to extend terms to borrowers who are making payments on time are a clear indication of the stress financial firms are facing to shrink their balance sheets in the face of being unable to gain access to capital.

Interestingly enough this quote from a Marketwatch article shows that of the top 10 debt offerings in 2009 all have been by banks except one.

If banks aren't lending, you can bet that companies will be turning to the bond market. They are, but they're not exactly driving the market's 10% increase so far this year. Of the top 10 debt deals this year only one, a $10 billion offering by General Electric Co. GE, was not issued by a bank, the government or a government-backed entity such as Fannie Mae FNM.

The article does not go on to show how many of those bank debt offerings were also backed by the FDIC under the Treasury plan announced back in October 2008. Details of this part of the plan are as follows:

FDIC GUARANTEE PLAN

* The Federal Deposit Insurance Corporation, the government agency which traditionally guarantees deposits at banks, will guarantee senior unsecured debt issued by U.S-regulated banks, thrifts and other depository institutions issued before June 30, 2009, including promissory notes, commercial paper, inter-bank funding and any unsecured portion of secured debt. This must not exceed 125 percent of debt outstanding on Sept. 30, 2008.

* This debt would be full protected in the event that the issuing institution subsequently fails, or its holding company files for bankruptcy. Coverage would be limited until June 30, 2012, even if the debt's maturity exceeds that date.

* The FDIC will guarantee all funds in non-interest-bearing transaction deposit accounts held by FDIC-insured banks until December 31, 2009. These are mainly payment processing accounts, such as payroll accounts used by businesses.

* Fees for these guarantees would not rely on taxpayer funding. They would be paid by participating banks that would pay a 75 basis-point fee to protect their new debt issues and a 10 basis-point surcharge for deposits not otherwise covered by the existing deposit insurance limit of $250,000.

All FDIC-insured institutions will be covered under the program for the first 30 days without any costs. After this initial period, banks not wishing to continue their participation will have to opt out or be assessed for future guarantees.

(Obtained from nice Reuters Treasury plan article Here)

As I have mentioned many times before, having the government backing debt virtually unconditionally here for regulated banks they are saying, "We are the government and we have invested directly in banks and we do not want to loose our investment so we are allowing the banks to borrow money from the market with our backing."

This is all good and well if you seriously think the government should become the debt market but think of what has happened. The debt markets have further seized up for any institution not backed by the government. I mean, "investors" are looking out the window and seeing a falling economy and thinking, "If I am going to buy debt, why should I buy anything not backed by the government?"

In fact all this government meddling in the debt markets is getting way out of hand. I believe for all the "good" intentions of the Fed and Treasury to "support" a non existent market, they are creating serious traditional economic imbalances that will delay a recovery in the market, exaggerate the need for additional capital support by financial institutions and make it virtually impossible for non-financial institutions to borrow money on acceptable terms.

As for that $1 Trillion in debt support, it may buy us another 6 months. Will the market recover by then? Time will tell. I said many times early in this crises, the government does NOT have the resources to forestall this crises and frankly the lax regulation and poor oversight of the financial markets since laws created in the 1930's were overturned over the last decade leaves little to no options to stop the bleeding in our economy. The beast had become to large and fat to handle.