This is Not Financial Meltdown

Is this the low point of the crisis so far? From the stock market's point of view, yes, it is. And the numbers coming out of the Treasury market would certainly seem to imply a flight to quality of unprecedented magnitude. Put plunging credit markets together with imploding banks, and there's little doubt about what results: a soaring TED spread, right?

Wrong.

The TED spread today is 213bp -- more or less exactly where it's been for the past few weeks. Which says to me that for all that financial stocks are being crushed, this is no reprise of the financial crisis we saw in the wake of Lehman's collapse. Rather, it's an old-fashioned economic crisis, which severely erodes the equity of leveraged banks, but where money still flows and even the occasional IPO can get away if it's priced at a discount. Or, to put it another way: it's a bear market, not a financial meltdown. Which might be little solace to anybody whose stocks have been crushed of later, but which might help reassure policymakers at least a little.

Banks' capital structures can cope with this: once the common is eroded, the bank belongs to its preferred stockholders. It's not the end of the world if Citi stock goes to zero, and the Fed has made it very clear that Citi's senior creditors are going to remain whole. This is not a great environment for a firm's stock to be wiped out, but with the help of Treasury, it might not even need any new money to be able to continue operating indefinitely. Assuming it doesn't sell itself first, of course.