Credit markets show signs of life
Financial Analyst Peter Cohan of Peter S. Cohan & Associates
TEXT OF INTERVIEW
SCOTT JAGOW: The whole idea of capitalizing banks was to get them to lend again. And there are finally some signs the credit markets are loosening.
We're joined now by Peter Cohan, a financial analyst with Peter S. Cohan and Associates. Welcome to the program, Peter.
PETER COHAN: Ah, it's great to be here.
JAGOW: So we're seeing interbank lending rates slowly but surely come down. How much of this can we attribute to the TARP money? To the money we gave the banks?
COHAN: I would say we can attribute zero of that to the TARP money. And here's the reason why: The TARP money went to buy equity stakes, relatively small equity stakes, in banks for the most part -- with a little bit going to Chrysler and GM. And the fact of the matter is we don't know what the banks are actually doing with that. Are they spending it on bonuses? Are they spending it to pay people? We don't know. But the fact of the matter is, what's really moved the TED Spread has been something that the Fed actually did. They spent $2.4 trillion to buy commercial paper. And that's a huge injection of money into the commercial paper market. And because of that, people are a lot more confident about doing those kinds of short-term loans.
JAGOW: I don't want to get too into the weeds, for my own personal safety, but explain the TED spread in a couple of sentences.
COHAN: Well, it's basically the difference between what the banks lend to each other over a three-month period. It's also known as LIBOR -- that's one of the parts of the equation. The other part is the three-month Treasury Bill rate. So, when you subtract the LIBOR from the Treasury Bill rate, that's the TED Spread. And it was 486 basis points, which is 4.86 percent, and now it's down below 100 basis points, or 1 percent. So the spread getting narrower means that there's much less risk, and there's a lot more liquidity in the short-term credit markets.
JAGOW: So, it has to do with the perceived, at least, credit risk in the economy.
COHAN: Yes, if the rate is very, very high over a three-month period, that means that banks are terrified to lend to each other. But when it gets below 100 basis points, that's good. I mean, it should be about 30 basis points, but it's made a huge, huge progress.
JAGOW: Now, let's get back to the TARP money. If the idea was to get banks lending again, and we're not seeing any direct correlation between the TARP money and what is happening here, why did we give the banks so much money?
COHAN: Well, we gave them the money because Hank Paulson said, We need this money or heaven help us. I think one of the things that I think is good is that, in trying to get that second $350 billion, that the Congress and the president are going to try to get more of an accounting of what they're doing with it. And then we'll have a better idea of whether it's helping or not.
JAGOW: Now, it's fine to hear that the TED Spread is lower and that the LIBOR rate is down, but how are we going to know on the ground that we're actually seeing the credit markets loosen up?
COHAN: Well, the key thing is that 70 percent of GDP growth is attributable to consumer spending. And one of the reasons why the unemployment rate is going up, the GDP is shrinking, is because consumers can't borrow to buy things like houses and cars. And that's because the banks and the people who might extend that credit are just really nervous about getting repaid. So, we're going to know things are improving when people start buying cars. You'll see those monthly car statistics actually go up. So that's really going to be the test.
JAGOW: So all we have to do is look out for the neighbor's new car?
COHAN: Absolutely. Absolutely. If you start seeing people driving shiny new cars instead of rusty old ones, you'll know that things are getting better.
JAGOW: I think that's still a ways off, Peter.
COHAN: I'm afraid it's several years off.
JAGOW: All right. Peter Cohan runs his own venture capital firm. His new book is called, "You Can't Order Change: Lessone From Jim McInery's Turnaround at Boeing." Thanks for joining us, Peter.
COHAN: Thank you. Have a great day.