“The insertion, last month, of $250 billion of equity into American
banks through TARP (a two-percentage-point addition to capital-asset
ratios) halved the post-Lehman surge of the LIBOR/OIS spread. Assuming
modest further write-offs, simple linear extrapolation would suggest
that another $250 billion would bring the spread back to near its pre-crisis
norm. This arithmetic would imply that investors now require 14% capital
rather than the 10% of mid-2006. Such linear calculations, of course,
can only be very rough approximations. But recent data do suggest that,
while helpful, the Treasury’s $250 billion goes only partway towards
the levels required to support renewed lending.”
