http://online.wsj.com/article/SB122402984044334627.html
Less than two weeks into it, the $700 billion Troubled Asset Relief
Program (TARP) is stuck between a rock and a hard place. Next week,
several hundred billion dollars of credit default swap (default
insurance) payments on Lehman's debt default are due. No one quite
knows who owes what and if they're good for it. Hence the urgency in
Henry Paulson and Ben Bernanke's plan to inject $250 billion directly
into bank balance sheets, which seems a necessary evil to get capital
to the right place and help weaker banks save face. The credit markets
agree -- so far.
Wall Street and banks live by short-term loans. But as a loan shark
might say, right now, nobody wants to lend to nobody. The rate that
banks charge each other, the London Interbank Offered Rate (Libor), has
been trading so high above three-month Treasury-bill rates (on Monday
it was 4.75% vs. 0.11%) that no one is lending. This so-called TED
spread -- the difference between what banks pay and what the Treasury
pays to borrow for three months -- signals the health of credit markets
and has rarely been over 1% since the 1987 crash. The Treasury is
clearly focused on this metric and needs to get it down to historic
spreads. First it has to change the current mentality of "who wants to
lend to the next Lehman or Wachovia?"