Banks no longer want to lend to other banks. Interbank lending has dried up.
The liquidity crisis has spread to the US commercial paper market, an essential source of funding for many companies' daily operations (used e.g. for purchasing inventory or managing working capital / operating liquidity), which Reuters reports has shrunk to its smallest level in 2 years.
With the US having to finance the bailout with the sale of billions of bonds, America's sovereign triple A rating could come under scrutiny. Euromoney's bi-annual country risk index (evaluating political and economic stability, but focusing on sovereign default risk) puts the US in 10th place. In 1st place is The Grand Duchy of Luxembourg. Many duchies existed during the Napoleonic Wars but Luxembourg is the last remaining one in the modern world. But that's by the wayside - how is the US going to finance the payback of these bonds? It will invest the money in mortgages and if the people holding those mortgages eventually pay them back, the Treasury can use the money to pay back investors.
What seems clear is that a lower leverage business model will evolve among banks. Even with less leverage, confidence is still a prerequisite to survival. And what of the future of credit securitisation? What new laws will be put in place to control credit speculation?
Also last week panic buying of commodities including gold forced the U.S. Mint to suspend sales of American Buffalo 24-karat gold coins because it couldn't keep up with soaring demand from investors for commodities and similar asset classes believed to be "safe havens" from the credit crisis (reported in msnbc).
Meanwhile, FinanceAsia evaluates Nomura versus Goldman Sachs.
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