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September 14, 2010
On Friday September 10th, the Ted Spread closed with a value of 16.03 bps. Two years ago, on September 10th, 2008, the Ted Spread closed at 117.97 bps, and just five days later, after Lehman Brothers collapsed into bankruptcy, the spread closed at 201.38 bps. The global financial credit crisis tsunami was underway and soon reached ‘100 foot rogue wave’ proportions. The credit melt down moved rapidly toward its’ peak on October 10th when the Ted Spread reached 463.62 bps.
The Ted Spread is considered an indicator of credit risk. It is the difference between three-month futures contracts for U.S. Treasuries (which are considered risk free) and three-month contracts for Eurodollars (which reflect the credit ratings of corporate borrowers) having identical expiration months. The Ted Spread has historically remained in a range of 10 to 50 basis points.
In the autumn of 2008 the economy was in frenzied freefall as liquidity in the markets disappeared. The Equity markets which had been at an historical high in late 2007 when the Dow Jones industrial average reached 11,400 were now at 8,400, and on the way to a 6,600 low in March 2009. Consumer and business spending declined sharply and employment collapsed. The nation’s unemployment rate went from 6.2% in September 2007 to 9.5% by June 2009.
On October 13th 2008, then Secretary of the Treasury Hank Paulsen and Federal Reserve Chair Ben Bernake and their consortium took dramatic action. Nine major domestic bank CEO’s were called to meet that weekend and all were asked to sign on to the ‘solutions’ term sheet with no CEO allowed to leave until all had penned their names to the ‘agreement’. The markets swayed and strained- Merrill Lynch, Wachovia, Countrywide, Fannie Mae and Freddie Mac were deemed unsinkable and ‘life boated’ by Bank of America, Wells Fargo and the U.S. Congress. A few weeks after the 2008 November general election General Motors and Chrysler were deemed too unionized to fail and transformed into Government Motors, auto executives were dismissed and company bond holders were considered forfeitable capital providers.
Less than six months later in March of 2009 markets began to regain their footing. A new dialectic had surfaced- banks and individuals each realized the value of a strong balance sheet. Personal and business ‘leverage’ idolatry and ‘embraced’ risk had at last succumbed under near panic to a new, yet old axiom: trust and confidence are borne from thoughtful, prudent decisions; investing for conservative risk adjusted, but predicable cash flows and seeking to create longer term values through productivity and innovation.
What appeared two years ago as a need for difficult but practical economic solutions in a time of unprecedented credit scarcity that had quickly turned into a broad, global economic crisis had been sized as an opportunity to enact fundamental economic and social change. We have today, after eighteen months of congressional haggling, a 2,500+ page Healthcare Bill that will not be implemented in large part till 2014, a 2,200+ page Dodd-Frank Financial Reform Bill that has yet to have implementation rules written, and an economy that has paused after three quarters of economic growth. But the Ted Spread this week is at 16 bps, a 96.5% decrease from the peak of the crisis in October 2008, a solid indication that confidence in the credit markets at least returned for the moment.