We've heard a lot in the past few days about how the SEC's fraud case against Goldman Sachs has shaken market confidence. (A couple of hundred stock-index points and an about-face in bond, currency and commodity markets will do that to people.) But "confidence" is a nebulous thing; how can you really tell if we investing hordes are just being careful here, or if we're genuinely fearful that a regulatory witch hunt is about to re-awaken the financial-sector demons that knocked us all on our fannies a year or two ago?
The short answer, says National Bank Financial, is look at the TED spread.
You remember the TED spread, right? It went from obscure bond-trader blather to required reading during the credit crisis. It measures the spread between the LIBOR (London Interbank Offered Rate, the interest rate on loans between banks on the wholesale market) and U.S. Treasury bills. The TED spread is indicative of how tight credit-market conditions are - and, by implication, how nervous big lenders are about risks in the financial sector and their potential to spread like a grass fire on parched prairie.
The TED spread topped 400 basis points (a basis point is one-hundredth of a percentage point) at the peak of the credit crisis - reflecting a credit market utterly paralyzed by panic, fearing the markets were littered with financial land mines.
A year ago, it hovered near 100 basis points - evidence of a market that was functioning again, yet still hyper-alert to risk.
Today? The TED spread is 16 basis points. That's as loose as it's been in years, suggesting banks are pretty darned comfortable with the financial risk levels out there.
And as NBF chief economist/strategist Stéfane Marion pointed out, the Goldman charges have had little effect on the TED spread. It has crept up less than a single basis point since the news broke.
It would appear that if the SEC wants to extract its pound of flesh from credit-crunch culprits, the market is of the opinion that it's basically taking it from beasts that have already been slain. And while it might hurt Goldman and maybe a few other names, the capital markets themselves won't feel a thing - except for the occasional psychosomatic hiccup.
"This situation suggests that the contagion is limited and the recovery will stay on track," Mr. Marion concluded.