Delayed response by Paulson led to virus spreading all over the system
One of US Treasury Secretary Hank Paulson's biggest mistakes has been his delay in tackling the US financial crisis before it spread throughout the financial system. Like cancer, one has to treat it before it spreads to other parts of the body, otherwise it will be too late.
Several critics, including George Soros, the hedge-fund financier, have argued if Paulson had taken on the US financial system earlier this year after the Bear Stearns collapse, he could have saved Lehman Brothers and prevented its bankruptcy. The collapse of Lehman has spread the financial virus throughout the US and global financial markets.
One US research house has put the US debt-related losses at about US$2.7 trillion (Bt91.92 trillion), with the mark-to-market ones totalling $575 billion.
"These aren't precise numbers, but they are broadly indicative. The main thing to take away from them is that they are huge and that they are much larger than they were when we first started to do our estimates. And the reason that they are larger is that the problems were not contained," said the research house.
Then there are the estimated declines in equity. Because of declines in real estate and equities, another $12 trillion is lost.
"With these losses, Americans' net worth is reduced and prospective incomes are reduced, so their creditworthiness is reduced," the research house said.
European and UK leaders have rushed to push out emergency measures to shore up liquidity. At a summit in Paris, the European leaders announced a rescue plan that is modelled after the UK plan. The European plan will also offer five-year government guarantees for new bank debt.
This follows the UK Treasury's action last week to bail out the big banks. Under the plan, the government will inject ฃ37 billion (Bt2.21 trillion) in preference shares into the Royal Bank of Scotland ( RBS), Lloyds TSB and HBOS, which will likely give it a controlling stake in RBS and a significant stake in the combined Lloyds/HBOS.
Moreover, the Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank have announced that they will offer unlimited collateralised dollar liquidity to unfreeze the money markets.
Paulson has adjusted the $700-billion rescue package to shore up the US banks' capital instead of buying out the bad debts from them alone. The idea is to help the banks maintain their capital-adequacy ratio standard.
Initially, he wanted to buy out just the bad debts, but the financial markets went on a selling spree because they did not believe this was the right cure.
Now, $125 billion of the $700-billion package will be used to inject capital into nine US commercial banks. This will strengthen their balance sheets and help them to weather the financial storm.
Hopefully, they will be in a stronger position to snap up the weaker financial institutions.
Another $125 billion will be spent on increasing the capital of other financial institutions, while the rest will go to buying out the bad assets of the financial institutions in order to relieve the burden from their books.
Paulson has insisted that once the bail-out plan is up and running, the banks will become healthier and can resume lending to their customers.
But the problem is that the banks might have to think twice before lending to corporate or individual customers, most of whom are over-leveraged.
The banks will either have to give customers more cash to refinance their debt or they will need to write down the debts, a process that would be painful.
In the Thai experience following the 1997 financial crisis, the banks only hoarded the cash and bought government securities instead of taking a risk of lending the money to their customers, who might become non-performing loans again. It was not until after five years that the banks started to shift gear to lend their money again.
**An analysis by By Thanong Khanthong,The Nation, Published on October 15, 2008**
3 comments:
We cannot entirely blame Mr.Paulson as he is not the sole saviour of this financial catastrophe.
What were the Bush's democrats were doing?
It is a systemic effect & will take time to settle down the dusts.
Actions;
a) Central bank governors of G11 countries must meet to raise up the action points to resolve the crisis.
b) Each country must put a target date to put their action plans.
c) Hire professionals & seek their assistance to expedite the plans
Ravi - Tell me what is impossible in these simple steps ?
If they still find it impossible, then they need to call "Adidas" management team to say "Impossible is nothing"
The U.S. Treasury is considering taking stakes in insurers, as it prepares a new round of capital injections to target regional banks and other financial companies, a person briefed on the plan said.
A final decision hasn't been made on whether insurers will be included in the government's purchases of preferred equity, said the person, who spoke on the condition of anonymity. The Treasury, which had planned to announce investments in about 20 banks, reversed course and will let firms disclose their own share sales in coming days, the person said.
An initial $125 billion out of $700 billion approved by Congress was allocated last week to buy shares of nine of the largest U.S. banks and another $125 billion was set aside for smaller lenders. Investments in insurance companies would widen the scope of Secretary Henry Paulson's Troubled Asset Relief Program as the credit crisis deepens.
``Capital adequacy has been a major concern among investors'' in insurance companies, said Nigel Dally, an analyst at Morgan Stanley in New York, in a note to investors today. ``If the Treasury were to purchase preferred equity stakes in some insurers, it would help calm these concerns.''
Paulson has shifted the government's financial rescue program to focus on equity purchases after markets deteriorated faster than policy makers anticipated. The strategy offers a quicker way to deploy taxpayer funds, Neel Kashkari, the Treasury official running the bailout plan, told lawmakers yesterday.
Mandatory Participation
A group of insurance companies -- primarily life insurers -- asked the Treasury earlier this week if they would be eligible to participate in the program, said an industry official with knowledge of the discussion.
Some life insurers have asked the government to make the participation of life companies mandatory because firms don't want to identify themselves as needing funds, the person said.
Earlier today, PNC Financial Services Group Inc. said it is acquiring National City Corp. for about $5.2 billion in stock after getting a $7.7 billion infusion from the Treasury.
Regions Financial Corp. and First Horizon National Corp., the biggest banks in Alabama and Tennessee, respectively, said today they received preliminary approval to receive capital from the Treasury. Regions is selling $3.5 billion in preferred stock and warrants and First Horizon is slated for an $866 million injection, the companies said. Other regional banks may say that they have sold shares to the government in the coming days.
Banking Units
Under the Treasury's rules for the capital injection program, some U.S. insurance companies -- those with a banking business -- are eligible to request an equity investment from the TARP.
The rescue law requires that Treasury's investments be publicly revealed within 48 hours. It isn't clear whether that means from the time the bank is approved or from when it receives the funds.
Today, the Financial Services Roundtable, a trade association of the 100 largest banks, securities firms and insurers, asked Treasury to broaden its guidelines so that insurance companies, broker-dealers, automobile companies and institutions controlled by foreign banks could also sell stakes to the government.
``The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market,'' wrote Steve Bartlett, the group's president in a letter today to Kashkari.
45% Plunge
U.S. life insurance stocks have plunged about 45 percent in the past month on concern that losses on corporate debt and mortgage-backed securities will squeeze the firms' liquidity and force them to raise capital.
The Standard & Poor's 500 Insurance Index today rose 2.31, or 1.7 percent, to 139.66. The broader S&P 500 Index fell 31.34, or 3.5 percent, to 876.77.
MetLife Inc., the biggest U.S. life insurer, raised about $2.3 billion this month in a stock offering, and Hartford Financial Services Group Inc. said it would raise $2.5 billion from Allianz SE.
The largest insurers in the U.S. and Bermuda posted more than $93 billion in writedowns and unrealized losses on holdings tied to the collapse of the U.S. subprime mortgage market since the beginning of last year. Insurers invest policyholder premiums in bonds before paying claims.
AIG's Decline
American International Group Inc., once the world's largest insurer, accounts for about $48 billion of the declines.
AIG, which posted three straight unprofitable quarters because of bad bets on the housing market, agreed last month to turn over an 80 percent stake to the U.S. in exchange for an $85 billion loan. The New York-based insurer subsequently tapped a second federal credit line and has borrowed $90.3 billion.
AIG may need more than the $122.8 billion available, Chief Executive Officer Edward Liddy said Oct. 22 on PBS's ``The NewsHour With Jim Lehrer.''
Insurers including Allstate Corp., Prudential Financial Inc., Lincoln National Corp., MetLife and Travelers Cos. have suspended or scaled back share buybacks to shepherd capital as losses from fixed-income investments mount.
Source - Bloomberg
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