Banking problems - paralysis by analysis?

[johnfm]

Paralysis by analysis - it is an old sporting psychology term - often applied to those who 'choke' on the big points or get the yips etc.

Thinking today about the current frozen situation where banks are just not lending to eachother - am I right in thinking that they are just sitting on their hands hoping that Paulson and the governments will bail them out and so not contributing to the solution by trading?

I am not a banker (nor anything that rhymes with banker!), but don't the banks need to grow some balls, man up a bit and get on with their business at the same time as the governments and central banks help liquidity?

Or are the bankers 'choking' now that they have tricky, downhill 5-footer (sometimes called a Dennis Wise - a nasty 5-footer!) to make the cut?

[Shabs]

Banks don't actually take a lot of risk, I know it sounds silly, but most investment banks are just there to service clients - like hedge funds, pensions, insurance firms (basically any institution with a lot of liquid cash needing to make a return). Of most big banks, only a very small percentage of revenue (10-15%) is made up from proprietary trading, or taking risk yourself.

At times like this clients do trade, but volumes this year have been far below average (like 50% of this time last year, and even then tiems were tough). This is because clients are afraid of the volitility in the market and it is difficult to make any return from long-only strategies when everything is going down. This makes people short sell, now that short selling is banned for financial stocks, nobody wants to do anything.

As for lending, banks are lending to each other but the spread has widened. You have to understand how inter-bank lending works, but the issue is not that banks won't lend, it is that the risk premium is high because of the volitility in the market. Because debt is more expensive, banks have to pay more for the same debt that they carried say a year ago and as such they have to reduce the debt they use to finance their business. This means selling assets.

HTH, it is really not that hard to understand if you are interested and a few hours reading about how to value a bank will probably let you understand why the markets are so bad at the moment.

Shabs

[Simpo Two]

I heard that quite a few banks were technically bankrupt in the 1980s but it was kept quiet from the braying media and so they managed to trade their way out.