"...spreads between the Treasury rates and lending rates are widening.."

[live love laugh]

according to the fed chair who reduced rates again today.

Why is the gap widening is what I want to know?

I am sure somebody here can explain it.

eta link: http://www.forbes.com/afxnewslimited/feeds/afx/2008/02/27/afx4703902.html

[NMDemDist2]

1. cuz the banks need the extra spread to cover their losses in the

mortgage mess

[live love laugh]

3. That makes sense. Thanks. nt

[arendt]

7. The banks did this in the early 1990s, after the S&L mess...

a friend who was an economist told me at the time that the banks simply refused to lend money unless the spread was set to refill their depleted coffers.

It was a ripoff then, and its a ripoff now. As usual, the consumer or the taxpayer gets the bill; and the bankers get a free ride. Scum-sucking bastards, all.

arendt

[On the Road]

2. The Spread Was Cut to the Bone a Couple of Years Ago

as lenders tried to lure homeowners into borrowing money. Now they're scared of defaults and in a position to add a larger risk penalty.

[live love laugh]

4. I can see how they'd want to discourage borrowing. Also makes sense. Thanks. n/t

[On the Road]

6. It's Partly a Gague of the Mood of the Finance Industry

I'm not saying it's devoid of a desire to soak borrowers, but there's also an element of fear, both fear of default and fear of inflation, which can make a loan worth less than its value. In the 80s, the spread stayed high for years due to memories of the inflation of the 1970s. The mindset takes awhile to change.

I imagine lenders are putting survivial over expansion right now. Once a few companies are confident enough to begin growing again, there will be a slew of better offers and rates will fall again. But for right now it's frustrating to have variable rates not responding in concert with Fed cuts.

[sepulveda]

5. the spread

in large part has to do with risk perception.

much like the action in corporate bonds lately have been pointing to

essentially the premium between lending rates and treasury rates (the spread) is the cost that banks charge to take on the risk of lending out money


iow, banks get their money for X%

they lend it for X+Y%.

Y% is their spread. in a perfect world for banks (all loans paid back to them), Y would be their profit

the greater Y is, the higher they are assessing risk at. the risk being that a loan defaults, etc. in which case they lose.

if an individual bank prices it too high, somebody goes ot another lender that prices it lower.

essentially, it's a forward looking proxy for risk assessment

[arendt]

8. Risk perception is the BS excuse for getting lots more money for nothing...

its the same BS the oil industry used to run up the prices at the beginning of the latest Iraq War.

The bottom line is that the banks are broke, and if they don't get oodles of free cash, they are going under. That's the "risk" their perceiving.

arendt

[gravity]

9. It is risk perception

The banks have lost a lot of money making risky loans, and they are taking a conservative approach to lending money because they can't afford anymore losses. The credit markets aren't as stable anymore so it adds more to the risks.

If banks could make money lowering interest rates with reasonable risks, they would be doing it right now.

[sepulveda]

10. correct

there is this constant (mostly among peopel that don't understand capital markets) belief that the little guy always gets screwed and the corporation always make out great

lol

google: nick leeson if you want to see how an entire bank can be brought down.

many banks have been sorely hurt by this credit crises. HUNDREDS of hedge funds have had to liquidate their holdings. many very rich people lost mucho dinero

and as i said, and the above poster agrees with. it IS about PRICING RISK

that's how markets work. you can believe your prejudices, or you can study the bond and loan markets. they are risk pricing mechanisms.

i trade indexes, and to a lesser extent bonds, and derivatives every single day fwiw. so, i have to know this stuff

[A HERETIC I AM]

11. You don't actually expect very many DU'rs will "study the bond and loan markets" do you?

I notice you've only been a member a few days, but you might have been reading this website for years - who knows - but if you have read very much at all, including the daily "Stock Market Watch" thread, you'll know that many posters here are seemingly intentionally ignorant of how banks operate, how bonds are structured, the difference between the Federal Reserve and the U.S. Treasury, what the "LIBOR" is, the difference between the Fed Funds rate and the Prime rate, etc.

It IS about pricing risk but it is my considered opinion that thinking or hoping very many members here will completely understand that is akin to pissing up a rope. People are often too comfortable thinking the way they think and there is no shifting it. It is much more satisfying for many to continue to think the financial markets are a scam deliberately set up to make them poor.

i trade indexes, and to a lesser extent bonds, and derivatives every single day fwiw. so, i have to know this stuff

I'm curious to know, do you work for a firm or do you just trade your own account?

[sepulveda]

12. my own

i trade my own, but also trade some OPM (other people's money) independently

i have been reading a while, and you are right. i *am* expecting too much. preconceived biases are bad. i don't mind people not knowing... there's tons of stuff i don't know :)

but i mind when people just automatically assume nefarious intent, evil, etc. without knowing the facts first. when it comes to corporations here, they are ALWAYS guilty until proven innocent, and the proof is gonna be ignored anyway,so why bother