For Pete's sake, banks, what's next? First it was subprime, and then a deluge of CDOs, Alt-A's, ABSs, SIVs, ARSs, and CDSs, most of which even in-the-know investors had no more than a faint understanding of before last year. Now we're getting news of another credit headache posing a whole new set of problems: By the end of 2009, banks will have to repay a record $871 billion in maturing bonds. That due date will cause quite a scramble in the banking world over the cheapest ways to roll over the maturing debt in the months to come.
At the apex of the maturing debt comes a whole new finance-related cluster of initials for investors to add to their vocabulary: FRN, for floating rate note. FRNs were a highly attractive way for banks to raise money in previous years, when interest rates were paltry, but now that piles of this debt have reached the end of their string and debt markets are stubbornly bound with paranoia, rolling over that debt is easier said than done.
As early as last summer, banks could borrow in the FRN market for just 0.02% above the benchmark London InterBank Offered Rate, or LIBOR; today, the going rate for some banks is at least 2% above LIBOR. For banks dealing with massive write-offs, that's a terrible spot to be in. Merrill Lynch
The crunch on the cost of banks' capital essentially means two things: Profit margins get crunched, and desperate banks pull out all of the stops to gain access to cash. WashingtonMutual
I know. Most readers couldn't give two hoots about banks' capital-raising concerns. But you should. Cramming down on margins eventually means stricter and more expensive lending throughout the economy, and that means higher interest rates on everything from car loans to credit cards.
For related Foolishness: