Beyond the Panic: Banking Relationships and the New World Order

Business Finance: Tell us about your banking relationships and how the relationship-building environment has changed in light of the economic crisis. How have the criteria that you use to assess the value of a banking relationship changed?

Alvarado: I would say that we've had a pretty solid foundation of financial institutions. We always wanted to be with quality banks, and so there's always been this search for quality, and to make sure that we've had institutions that could meet that need …

This has led to a stronger flight to quality. I have found that the credit default swap (CDS) has been an excellent instrument for being able to see in advance institutions that were in trouble that either went under or had been acquired. We really started watching the CDSs after the Bear Stearns collapse. The CDS had been one metric where we had seen banks go from roughly an average of 75 to 125, with European banks making up the lower portion. We saw Bear Stearns increase to 750. So they had really broken out of the pack four-, fivefold above all the other banks, and it just seemed to be just a matter of time before it was acquired.

After that we started to see the whole metric shift, and everybody increased above 100, then up to 200. Some started hitting 300 with, again, a couple of banks breaking out of the pack. We saw Lehman and Merrill hitting sort of that 600 to 700 range, and again, you start to see, I think, that pattern from Bear Sterns start to play out again. And it wasn't very long before Merrill Lynch was being taken over, and then Lehman went bankrupt. This then led to a run on and subsequent collapse of The Reserve Primary Fund.

We then saw Washington Mutual's CDS rate increase to 3,880, and you just knew that this was really in trouble. Wachovia was in the 1,000 range, and both firms were taken over.

So for me, the credit default swap became an excellent indicator to just see which firm was under pressure; it gave me some reassurance that other banks were holding up very well …