[IWE] The Real Cost and the TED Spread.

D. Scott Katzer iwe@warhead.org.uk
Thu, 25 Sep 2008 22:31:15 -0400

Hi Jay and All,

Jay Mehaffey wrote:
> That brings up an interesting point that I have not seen addressed yet.
> Which is, what is the real value of these securities?

Krugman talked a little bit about this in his blog yesterday:

"3. Even if it works, the system will remain badly undercapitalized.

Realistic estimates say that there will be $800 billion or more of real, 
medium-term — not fire-sale — losses on home mortgages. Only around $480 
billion have been acknowledged by financial institutions so far. So even 
if the fire-sale discount is removed, we’ll still have a crippled 
system. And Paulson is offering nothing to fix that — unless he ends up 
paying much more than the paper is worth, by any standard."

In one of his comments today, he mentions the "TED Spread" and links to 
a Bloomberg chart:


If you look at the 5 year chart (hit the 5yr button at the top), you'll 
see the spread was < 0.5% until August 2007 when it jumped above 1% (I 
haven't checked to see what happened in the news then, but I think it 
was related to earlier worries about mortgages).  On September 15, it 
jumped above 2%.  Yesterday it was above 3%.

According to Wikipedia, the TED Spread is the difference of interest 
rates between 3-month Treasury Bills and the 3 month LIBOR rate and so 
is an indication of perceived credit risk.  It's indicating that short 
term loans have gotten very much more expensive recently.  How much of 
it is driven by speculators, I can't say...


With the political machinations going on regarding this bailout (Thanks 
St. John!), Krugman's expecting another spike in the TED spread 
tomorrow.  Since tomorrow is also a Friday, and since many people don't 
like waiting for bad news over the weekend, I also wouldn't be surprised 
if the markets were very volatile tomorrow.

Oh, and JP Morgan/Chase just took over Washington Mutual...

Interesting times...  :-(