Procerity

Today Secretary Henry Paulson announced that the U.S. Treasury would not be purchasing the illiquid mortgage assets held by the banks. The markets reacted negatively to the announcement. But, that may have been a little short-sighted. True, those investors holding shares in banks that were in line for a hand-out were disappointed. But they needn’t have been. The reason Paulson is no longer interested in buying so-called “toxic” assets may be that he believes it is no longer necessary. The TED spread has been cut in half since its peak in October. TED, the difference between the 90-day U.S. T-Bill rate and LIBOR, the London Inter-Bank Offer Rate (the rate at which inter-bank lending takes place) has dropped from 460 basis points to less than 200. Perhaps, this provides the Treasury with sufficient evidence that liquidity is returning to the U.S. credit markets.

Procerity’s Prognosis: Expect an increasing reluctance to bail out banks with TARP funds and instead expect a diversion of funds to “rescue” the U.S.-headquartered automobile industry.