From the collapse of Lehman Brothers in September right up until the second half of November, US banks were entirely absent from the debt capital markets. It is a sudden turning off of the tap from a key source of funds.
In the first quarter of 2008, US banks and financial issuers had sold $97.5 billion of debt in the US corporate bond market; in the second quarter, they sold $133 billion, issuing at roughly the same rapid pace as in the second quarter of 2007, before the financial crisis had even begun. Then...nothing.
Spreads on bank paper gapped out to extraordinary highs, implying expectation of imminent and widespread defaults, during the fears of systemic meltdown in September, but as the US government and the Federal Reserve hurried to take over troubled institutions, invest in bank capital, inject liquidity and guarantee funding, they soon narrowed again.
When, the US Treasury injected $214 billion of capital into 60 banks through the so-called Tarp programme in October, five-year CDS spreads of US banks tightened – in some cases, halved – at a stroke. Citigroup’s spread came in from 351 basis points to 165bp, JPMorgan from 165bp to 80bp, Wells Fargo from 180bp to 80bp, Bank of America from 180bp to 100bp and Goldman Sachs’s from 554bp to 150bp.
