FT - US set for ‘big bang’ financial clean-up

US set for ‘big bang’ financial clean-up

ByKrishna Guha in Washington
Financial Times
Published: January 30 2009 23:31 | Last updated: January 31 2009 00:19

The Obama administration is gearing up for a “big bang” announcement next week that will combine a bank clean-up with measures to reduce home foreclosures and probably steps to kick-start credit markets.

The plan will involve an overhaul of the troubled asset relief programme – the $700bn bail-out fund – including strict curbs on compensation at banks receiving public aid. The Tarp overhaul is intended to restore public confidence in what is a deeply unpopular programme and ensure that taxpayer money is not used to fund excessive pay, bonuses and dividends to shareholders.

“There will definitely be a cap of some sort on bonuses,” said a Wall Street executive who has taken part in talks with the authorities. “The political climate is such that there is a need to punish Wall Street.”

The announcement will follow Friday’s news that the US economy contracted at an annualised rate of 3.8 per cent in last year’s final quarter – less than analysts were expecting, but still the worst quarter since 1982. The fall was cushioned by ballooning inventories, which suggest the economy could shrink faster than expected in the first quarter.

The “big bang” approach reflects the belief of Tim Geithner, Treasury secretary, and Lawrence Summers, National Economic Council director, that the Bush administration was wrong to dribble out policy initiatives. Mr Geithner intends to present a “comprehensive” plan that policymakers hope will command market confidence.

Details of the financial overhaul are being finalised and have yet to be approved by President Barack Obama, but it may include both the purchase of toxic assets by a “bad bank” and insurance-style guarantees for problem assets remaining on bank balance sheets.

Anti-foreclosure efforts are likely to focus on subsidising programmes that reduce unsustainable monthly mortgage payments, though there may also be support for schemes that subsidise the partial writedown of loans that exceed the value of the home. Treasury may also unveil new efforts to revitalise dysfunctional securitisation markets.

 

We got into this mess primarily because of GUMMINT SCREWING WITH THE MONEY.... do you think another sweeping "round" of that is going to fix things?

 

YES.. Let's sling some poo in the face of our biggest creditor! (Geitner re: China manipulating Yuan)

CHANGE!

Talking about China manipulating its currency is akin to telling a girl that you're about to charm her and take her home. Talking about the process ruins it, it's an insult.

It was BUSH who kept rates too low. It was BUSH who raided social security, it was Bush who sent us into the Great Depression, it was BUSH who caused Katrina, and BUSH WHO MADE THE GREAT TSUNAMI! IT'S ALL BUSH, OBAMA TEAM IS HERE TO SAVE US ALL! WEEEEEEE!!!

I want what they are smoking...

 

What is important is to keep moving, making decisions, right or wrong, act re-act.

 

Remember trade goes both ways. If we invoke protectionist measures against China, their exports go down, their currency weakens (in a natural state), and ability to purchase reserves falls. They stand nothing to benefit from a weaker currency if tariffs or quotas are in place since Europe (their primary trade partner) only wants so many goods from China (and they'll likely follow us...).

Likewise, I can imagine our trade deficit falls, our current account improves, and even if goods purchased in the US to offset fall in demand are more expensive, that results in increased local economic activity, thus likely higher savings rates here to accomodate treasury supply.

Think of this: If you were China, and your currency were falling naturally in value (ie Russia and the ruble with decreased oil demand), would you want to shoot yourself in the foot and liquidate your dollar reserves just to 'send a message'? There's no message to send - while a trillion and a half dollars of flows would temporarily hurt the dollar, the US would respond by choking China even more. Furthermore, without US dollar reserves to sell in the future, the treasury market would anticipate this and sharply correct. That was their accumulation of wealth from the last decade or so. If they do that, they will have essentially given the entire product they exported to the world at no charge. This will naturally happen as they attempt to maintain a peg just to keep their buying power for resources up.

Protectionism will kill China, and in the short term while we look to replace their output will be inflationary and will hurt US companies that profit from their cheap manufacturing cost, but I think we'll endure it a little more easily than them. Likely, protectionism against China would quickly result in a reshuffling of export capacity to other Asian countries that have better political relations with us.

Just imagine this. Over the last 2 months Russia flooded the market with 200B in USD (and likely treasurieS) to support the ruble.

And the USD index is climbing, treasury yields are near all time highs.

There's a lot of fundamental demand for USD with these new trade balances and bad USD loans worldwide, internally and externally.

 

Oh hell yes, hundreds of millions for Obama's campaign, min wage for the people who actually run the system.

 

Awesome. It'll be yet another opportunity to get short financials after they go up 30%-50% in the hours following the announcement.

 

These officials have seen it happen so many times by now. Announce something and see a one day rally (if that long), only to be followed by sharp tanking. Makes one wonder if this big bang will include something surprising that will cause a sustained rally.

 

the bottom in markets will not be reached until americans get a realistic picture of where power lies in the world today.

actually the market will reach bottom when deleveraging has run its course as determined by market forces not by governments whose actions are slowing the healing process and the proper reallocation of resources. "sustained " rallies are never the result of government actions.

treasury yields are at or near all time lows not highs

 

Well put. Thank you. I know it does not add content but I found the need to show support for the argument.