U.S. may need to insure wholesale deposits: Barclays Capital

The United States may need to insure wholesale deposits to ease the credit crisis and restore confidence because the collapse of Lehman Brothers has damaged trust among institutional investors, Barclays said.
"What happened in September was the wholesale equivalent of an old fashioned bank run," Laurence Kantor, head of global research at Barclays Capital, told reporters in Singapore.
"The markets are still unwinding the damage from Lehman."
He said the commercial paper market lost $200 bln in two weeks after Lehman collapsed as investors turned to safer government paper, and even after two months private investors are still reluctant to return to the commercial market.
"If you look at the commercial paper market today, it's improved mainly because the Federal Reserve is buying commercial paper," Kantor said. "There is still a dearth of private buying of commercial paper."
Kantor said institutional investors were not willing to leave their money with counterparties, which suggests more measures will be needed to restore confidence.
"In my mind we need some kind of insurance for wholesale depositors, just as we needed insurance for retail depositors," he said, adding investment banks want their commercial obligations to be fulfilled even if the counterparty bank collapses.
Barclays' view comes after two of Wall Street's top dealmakers said the U.S. government's $700 bln bailout is unlikely to be enough, with the financial system needing more than $1 trillion to get through the crisis.
Washington backed away on Wednesday from using the $700 bln fund to cleanse bank balance sheets of bad mortgage debt. U.S. Treasury Secretary Henry Paulson said he preferred instead to focus on buying stakes in banks to encourage them to increase lending.
Financial institutions still face losses in the fourth quarter and early next year as the economy and credit quality deteriorate, said Gary Parr, deputy chairman of investment bank Lazard.
The International Monetary Fund said last week the world's developed economies are headed for the first full-year contraction since World War II and governments should ramp up spending to support the global economy.