Sunday, September 25, 2011

Lehman and interbank lending freeze - what is going on today

We may be getting close to a Lehman moment for some of the large broker dealers. A Lehman moment would be one where no one wants to lend to broker dealers because they are afraid of their risks. This would be the risk of the unknown on their balance sheet. 

Lenders, in many cases institutional money markets, will want to hold T-bills at zero rates rather than hold the paper of broker dealers which may face a run on the bank because of balance sheet uncertainty.  Any financial institution that is dependent on institutional borrowing, not retail deposits, could be in jeopardy if there is a liquidity crisis.

These liquidity crisis could occur for no other reason than lenders do not want to hold risky paper from dealers who have unclear balance sheets. The easy form would be no lender wants to roll maturing paper. The overnight swap spread risk premiums have continued to rise even with Fed and other central bank lender so there is growing risk out there.

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