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Is the US bailout working?

Created by : Venkatachalam C V, Sr. Associate, JP MorganChase  | 11 21 2008 13:23:13 +0000
Industry : Investment BankingFunctional Area : Movers & Shakers(Markets)
Keywords : Working Us Bailout
Activity:  231 views;  last activity : 07 06 2010 20:18:09 +0000
When the US government announced an emergency plan to buy bad loans and other troubled assets from banks and financial institutions, it was hailed as the best solution to tackle paralyzed credit markets. But will this work? We have enough of data around to prove our point. So let’s do it.


  
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The $700 billion rescue package has sprouted other programs such as the Treasury's $125 billion into nine big banks as the first batch of its capital injections in the form of purchases of their stocks; hence the so-called bailout fund for toxic assets is in the works. There has to be an intervention made here by the Government without which it would have been a dooms day for the world economy. The very foundation of capitalistic economy was a mirage and it had to be broken
By Venkatachalam C V, Sr. Associate, JP MorganChase  11 21 2008 13:23:13 +0000
 
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Nearly a month later, the plan remains under wraps and money managers say it could have a fundamental flaw – only a handful of the biggest investors are qualified to run the program. It was designed as the core part of a $700 billion rescue package as it would root out toxic assets from the system, eliminating a key area of uncertainty for investors about when US and global credit markets would be cleaned out and resume normal functioning. But so far, no asset managers have been announced, suggesting that the government is running into difficulty in finding the most appropriate money managers for the job.


By Gandhi Rajan, Sr. Associate, ICICI Securities  11 21 2008 13:24:58 +0000
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I think there is a grain of truth to the idea.  The problem is that the banks don't know which mortgages are going to fail.  We could guarantee the mortgages, but that's more than just unfair, it's dangerously unfair.  It creates a moral hazard, where it's in people's best interests to stop paying their mortgages. So it's a nice thought, and there might well be another stimulus package, though I personally would propose at least another six months before we try it.  And it's not going to be anywhere near $700 billion worth.

 
By Santosh Bhosle, Associate, IFCI  | 11 21 2008 13:24:36 +0000
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What my friends are stating here is just an operational part of it. For starters: that $700 billion doesn't exist.  It would have to be borrowed.  Handing it out to people would be exactly like throwing a party and putting it on your credit card.  It would be an instant inflation in the money supply, raising the price of everything.  Further, it would raise the price at which the US borrows money, making it cost more and more to continue to finance the national debt.
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By Satish Pandey, Sr. Associate, IL&FS Venture Corporation  | 11 21 2008 13:28:44 +0000
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I would like to support Mr. Ranjan views. In order to compete for the contracts to buy and sell mortgage-backed securities (MBS) under the plan, companies must oversee at least $100 billion in US dollar-denominated, fixed-income assets for clients. Some investors say the $100 billion requirement shuts out many managers with decades of experience in MBS. I think the managers who have the assets under management to meet the minimum requirement have mostly proven to be incompetent in mortgage-backed securities.

 
By Ashim Chowdhury, Associate, ICICI Securities  | 11 21 2008 13:28:11 +0000
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