Tuesday, 16 September 2008

HBOS share price plunges

What is going on at HBOS? Earlier, the share price crashed 40 percent. It has since recovered, but the last time I looked, it was still down 25 percent.

The cost of insuring its debt against default has also jumped on fears of higher funding costs. The five-year credit default swaps were 387.5 basis points. That is one very expensive insurance policy.

3 comments:

Anonymous said...

In a meltdown, all risky assets take on a correlation of 1.0

Bookstaber's "Demon of our own design" has a particularly good discussion of why.

Nick

Anonymous said...

Forget HBOS, look at AIG.

A two year facility at 3-month LIBOR plus 850 basis points is considered a "bail out". I guess some who read the news will assume this is a rescue - whereas, in fact, it is merely the least damaging way to liquidate an insolvent insurer.

It remains to be seen, I guess, what implication this will have for the financial services sector - but I imagine, with ~$1tn in assets to be sold off, this will be of significant impact to the financial sector and the world economy as a whole.

Anonymous said...

asteve

I'm with you on the general observation that this is NOT a bailout. At first blush it seems to be the Fed following the cardinal rule of central banking - "lend freely, against good capital, at penalty rates".

Ok, so AIG isn't a bank but I think this is a rare case of the Fed overstepping it's legal role with good reason. AIG will be crushed, but the trades have a chance to unwind in orderly fashion.

Of course this will result in a ton of supply of risky assets that will depress prices all round. Not a good time for the boomers to be redeeming from mutuals and purchasing annuities.

Haven't heard much in the media about that demographic problem, but 2008 is the year it hits, and it'll be 18 years of sellers initiating the trades.

Nick