This CDS report was written by Markit’s Gavan Nolan
Spreads in financials are now at levels last seen in June after the US government became the latest to part-nationalise its banking sector. The administration has taken note of the positive reaction to European recapitalisations plans - notably in the UK - and adapted its rescue plan accordingly. Now $250 million of the $700 million approved by Congress - originally earmarked for buying back distressed assets - will be used to take equity stakes in nine major banks plus several regional banks. The Treasury will have have preferred shares in the banks and will receive warrants to convert them into common stock. Secretary Paulson made it clear that the policy was anathema to the administration but they had little choice given the gravity of the situation. Credit investors were relieved that the government had finally realised that capital was the main issue, and spreads tightened dramatically today. The performance of Wells Fargo - the only major bank in the Markit CDX IG - was typical (see chart above). Other, more volatile names in the sector, such as Goldman Sachs and Morgan Stanley, tightened by several hundred basis points.
Europe’s banks continued to outperform. The decisive and comprehensive action taken by Gordon Brown - now being dubbed a superhero by admiring European journalists - has been copied across the English Channel, North Sea and pretty much every other body of water separating Britain from the world. Systemic failure of the financial system - and the potentially dire consequences on the real economy - is now receding. However, the availability of credit, though freed from the straightjacket of fear, will remain restricted for some time. This will weigh on growth, as will the weakness of the consumer in major economies. More interest rate cuts can be expected in the coming months.
