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Tuesday 23 September 2008
Doubts Grow on US Bailout Plan
A PROPOSED US$700 billion bailout for the banking industry leaves many questions unanswered, but has prompted fears about giving the US government unprecedented power to intervene in the economy, analysts said on Monday.
WASHINGTON - A PROPOSED US$700 billion bailout for the banking industry leaves many questions unanswered, but has prompted fears about giving the US government unprecedented power to intervene in the economy, analysts said on Monday.
The plan would allow the US Treasury to sell new debt to purchase the vast amounts of mortgage securities and other ‘toxic’ assets that have caused a freeze-up of the financial system.
Markets welcomed the announcement of the plan last week, but analysts say the sobering reality may make it highly complex to implement.
Some critics say it gives unparalleled authority to the government in the finance system.
The plan is ‘three pages long’ and ‘asks for a staggering sum of money with wide-ranging powers to buy the broadest amount of mortgage-related securities with a minimal of oversight,’ said Mr. Andrew Busch at BMO Capital Markets.
‘This is a huge leap of faith and I suspect that leaders of Congress and the presidential candidates will urge caution or act cautiously.’
One key question is how the government will value the dodgy mortgage-backed paper that the banking system refuses to buy.
‘The Treasury did not provide much detail on how the assets will be priced, other than through market mechanisms where possible,’ said economist Brian Bethune at Global Insight.
‘We expect discounts on asset transactions will be anywhere from 20 per cent to 80 per cent, depending on the quality of the assets or the asset package involved.’
Some analysts point out that if the Treasury pays fair value - Merrill Lynch, for example, sold some of its distressed securities for 22 cents on the dollar - it could create fresh losses for banks and lead to more failures.
Mr. Mark Zandi at Economy.com said the idea was positive but may be hard to implement.
‘In practice, a reverse auction for mortgage assets may be tricky to pull off,’ he said. ‘Auctioning mortgage-backed securities could prove especially problematic, since each security is so idiosyncratic.’
Beyond the technical questions, the plan dubbed by some as ‘the mother of all bailouts’ has raised hackles among some who fear it gives too much power to the government in the financial markets, especially with a clause providing immunity from lawsuits.
Mr. Robert Brusca at FAO Economics said the bailout plan ‘really isn’t a plan and may not bail anything out ... The crux of it seems to be to dump the losses on taxpayers.’
‘It gives the Treasury imperial power with respect to a simply huge amount of funds,’ said Mr. Yves Smith, a financial analyst with the website Naked Capitalism.
‘This is a financial coup d’etat, with the only limitation the US$700 billion balance sheet figure.’
Some lawmakers also were skeptical about the carte blanche authority the proposal would give the government.
Texas Republican Representative Jeb Hensarling said lawmakers should carefully study options before approving the plan.
‘Congress is being asked to support an uncertain entity, costing an uncertain amount of dollars, for an uncertain duration,’ he said.
‘My fear is that taxpayers will be left with the mother of all debts, the federal government becomes the lender and guarantor of last resort, and our nation finds itself on the slippery slope to socialism.’
Despite the protests, many expect the plan to be approved to help stave off a further meltdown of the financial system with dire economic consequences.
‘We were on the edge of the abyss last week,’ said Mr. Ed Yardeni at Yardeni Research.
‘The question is whether so much government intervention will avert the most dreaded consequences of Wall Street’s excesses, namely a financial meltdown and an economic depression .... The answer, I think is that it will work, and that the economy should grow next year.’
Economist Scott Anderson at Wells Fargo said the plan is needed even if it was imperfect.
‘An economist’s instincts are never in favour of a solution that puts taxpayer money and the US Treasury’s finances at risk to correct the mistakes of a profit-driven industry,’ he said.
‘Nevertheless, we are left with the realisation today that this is a Great Depression-style financial crisis that requires a Great Depression-style solution’.
‘Indeed, the US government alone is the only institution uniquely equipped to deal with a problem of this magnitude. It is precisely for moments like this we have a government. Failure to act would be a failure of leadership.’ -- AFP
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Doubts Grow on US Bailout Plan
23 September 2008
WASHINGTON - A PROPOSED US$700 billion bailout for the banking industry leaves many questions unanswered, but has prompted fears about giving the US government unprecedented power to intervene in the economy, analysts said on Monday.
The plan would allow the US Treasury to sell new debt to purchase the vast amounts of mortgage securities and other ‘toxic’ assets that have caused a freeze-up of the financial system.
Markets welcomed the announcement of the plan last week, but analysts say the sobering reality may make it highly complex to implement.
Some critics say it gives unparalleled authority to the government in the finance system.
The plan is ‘three pages long’ and ‘asks for a staggering sum of money with wide-ranging powers to buy the broadest amount of mortgage-related securities with a minimal of oversight,’ said Mr. Andrew Busch at BMO Capital Markets.
‘This is a huge leap of faith and I suspect that leaders of Congress and the presidential candidates will urge caution or act cautiously.’
One key question is how the government will value the dodgy mortgage-backed paper that the banking system refuses to buy.
‘The Treasury did not provide much detail on how the assets will be priced, other than through market mechanisms where possible,’ said economist Brian Bethune at Global Insight.
‘We expect discounts on asset transactions will be anywhere from 20 per cent to 80 per cent, depending on the quality of the assets or the asset package involved.’
Some analysts point out that if the Treasury pays fair value - Merrill Lynch, for example, sold some of its distressed securities for 22 cents on the dollar - it could create fresh losses for banks and lead to more failures.
Mr. Mark Zandi at Economy.com said the idea was positive but may be hard to implement.
‘In practice, a reverse auction for mortgage assets may be tricky to pull off,’ he said. ‘Auctioning mortgage-backed securities could prove especially problematic, since each security is so idiosyncratic.’
Beyond the technical questions, the plan dubbed by some as ‘the mother of all bailouts’ has raised hackles among some who fear it gives too much power to the government in the financial markets, especially with a clause providing immunity from lawsuits.
Mr. Robert Brusca at FAO Economics said the bailout plan ‘really isn’t a plan and may not bail anything out ... The crux of it seems to be to dump the losses on taxpayers.’
‘It gives the Treasury imperial power with respect to a simply huge amount of funds,’ said Mr. Yves Smith, a financial analyst with the website Naked Capitalism.
‘This is a financial coup d’etat, with the only limitation the US$700 billion balance sheet figure.’
Some lawmakers also were skeptical about the carte blanche authority the proposal would give the government.
Texas Republican Representative Jeb Hensarling said lawmakers should carefully study options before approving the plan.
‘Congress is being asked to support an uncertain entity, costing an uncertain amount of dollars, for an uncertain duration,’ he said.
‘My fear is that taxpayers will be left with the mother of all debts, the federal government becomes the lender and guarantor of last resort, and our nation finds itself on the slippery slope to socialism.’
Despite the protests, many expect the plan to be approved to help stave off a further meltdown of the financial system with dire economic consequences.
‘We were on the edge of the abyss last week,’ said Mr. Ed Yardeni at Yardeni Research.
‘The question is whether so much government intervention will avert the most dreaded consequences of Wall Street’s excesses, namely a financial meltdown and an economic depression .... The answer, I think is that it will work, and that the economy should grow next year.’
Economist Scott Anderson at Wells Fargo said the plan is needed even if it was imperfect.
‘An economist’s instincts are never in favour of a solution that puts taxpayer money and the US Treasury’s finances at risk to correct the mistakes of a profit-driven industry,’ he said.
‘Nevertheless, we are left with the realisation today that this is a Great Depression-style financial crisis that requires a Great Depression-style solution’.
‘Indeed, the US government alone is the only institution uniquely equipped to deal with a problem of this magnitude. It is precisely for moments like this we have a government. Failure to act would be a failure of leadership.’ -- AFP
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