Monday, September 29, 2008

lower house of the US Congress has voted down a $700bn (£380bn) plan

The vote followed a day of turmoil in the financial sector.

* Wachovia, the fourth-largest US bank, was bought by larger rival Citigroup in a rescue deal backed by US authorities
* Benelux banking giant Fortis was partially nationalised by the Dutch, Belgian and Luxembourg governments to ensure its survival
* The UK government announced it was nationalising the Bradford & Bingley bank
* Global shares fell sharply - France's key index lost 5%, Germany's main market dropped 4% while US shares plunged after the vote result was announced.

As news of the vote came through, traders on the floor of the New York Stock Exchange stood dumbfounded.
clipped from

Washington's massive bailout of Wall Street has been rejected by members of
Congress amid dramatic scenes, after strong objections by the public to the $700 billion rescue plan.

House Speaker Nancy Pelosi walks on Capitol Hill in Washington
rank and file members of both the Republican and Democratic parties
rebelled, after many received complaints from their constituents
about the deal to use taxpayers’ funds to buy devalued assets of
major Wall Street firms.

All 435 members of the lower House of Representatives face re-election

on Nov 4.

With just a simple majority needed to pass the bill, 94 Democrats joined the
rebellion, defeating the bill by 228 to 205.

The bill was defeated by an unlikely alliance of conservative Republicans who
viewed the bill as “socialism” and left-wing Democrats who resented the fact
that the bill did not contain more provisions to help struggling homeowners.

US investors were also unnerved by the buyout of the country’s sixth largest
bank Wachovia by Citigroup--
stocks fell by nearly 9 percent on Monday — the worst single-day drop in two decades---setting off a fresh wave of anxious selling--The broadest measure of the American stock market, the Standard & Poor’s 500-stock index, fell 8.77 percent, its biggest drop since October 1987.--The fear was most pronounced in the world’s credit markets--Banks were charging enormous premiums for short-term financing; the difference between the cost of a three-month loan from a bank, and a three-month loan from the government, rose to the widest point since at least 1984. Other lending rates stayed high.--

the Federal Reserve moved to increase the amount of liquidity it makes available to major players in the world financial system. The Fed will triple the size of its regular auctions for banks and work with nine other central banks to increase the flow of credit.---hoping to combat a hoarding mentality that has arisen among banks, whose reluctance to lend — even to healthy institutions — has jammed up critical financial arteries that many small businesses depend on.

No wonder Congress slapped it back. It was never credible and would have delivered only temporary relief had US legislators embraced it. The left saw it as welfare for Wall Street and the Right derided it as a menace to free and efficient markets. It was both.

Already, the Wall Street banks were concocting plans to ``game'' the regulators, to make off with as much of that rescue loot as they could. As investment bankers do. Goldman Sachs was speculating last week how it and other investment banks could make a killing out of the deal. There was just about to be $US700 billion handed out after all, with no conditions or oversight on how it might be spent. Goldman was to swap assets into the Treasury which had already been written down. That way, the bank could book a profit on the deal--. the thinking was that $US700 billion might represent a price of 70 US cents in the dollar for delinquent assets. If the firm had already written down those assets to 50 US cents, said Goldman, there was a tidy 20 US cents profit!


This will now spill over into the real economy now, not in a trickle but in a flood. Asset prices have plunged so far that many more financial firms will hit the skids.There will however be buying opportunities for those with any money left. Forget bottom-picking the likes of bombed out financials. Resources stocks are likely to fall on global recession concerns.However, the volatility will be such that over the next few days there will be unprecedented opportunities to pick up defensive stocks on 10%-plus yields - only those with cash, low leverage and pricing power that is.

No comments: