US financial bailout disappoints

The much-anticipated US financial stability plan was unveiled yesterday at the same time as the Senate passage of the US$838 billion (Bt29.3 trillion) fiscal stimulus package to prop up the US economy. Altogether, Uncle Sam will be dishing out almost US$3 trillion to save the banking system and to stimulate the economy. But the financial markets reacted negatively to the financial bail-out package, which lacks important details. American and worldwide equity prices headed for a tumble.

Earlier, the financial markets hoped the plan would help troubled US banks get back on their feet and restart the lending needed to reinvigorate the stalling economy. Those hopes were dashed after US Treasury Secretary Timothy Geithner's announcement of the plan. The Dow Jones Industrial sank 4.6 per cent and the S&P500 plunged by 4.9 per cent. The US Treasuries, the US dollar and the yen surged as risk aversion returned, even as the Senate passed the $838 billion stimulus package following the announcement of the bank stabilisation plan.

The key part of the plan indicates that a public-private fund will mop up between $500 billion and $1 trillion of illiquid assets from the balance sheets of banks. The Treasury will provide long-term financing to attract private capital to buy up the troubled assets over the "next several weeks and months". But there are no details over the pricing formula to buy out the bad assets from the banks. Investors felt that the US Treasury should have made it clear how to handle the bad assets and to identify the solvent from the insolvent banks. Some will be saved while others will have to be bought out by the US taxpayer.

One portion of the financial package will involve the Federal Reserve's role in supporting up to $1 trillion in loans to consumers and businesses. This will provide financing to private investors to help unfreeze and lower interest rates for auto, small business, credit card and other consumer and business credit. This is an expansion of the previously announced Term Asset-Backed Securities Loan Facility (TALF) that has yet to be implemented. The previous plan provided support for just $200 billion of lending.

Another important portion of the package will see a commitment of $50 billion to prevent avoidable foreclosures of owner-occupied middle-class homes by helping to reduce monthly payments in line with prudent underwriting and long-term loan performance.

The plan will also see an injection of capital into banks as needed, and tighter restrictions that will include limits on dividend payments, acquisitions and executive pay. Recipients of capital will first be put through a test and will eventually come under government supervision.

President Barack Obama has staked his presidency on rescuing the economy, and the financial plans could mark the largest bail-out since the Great Depression. Obama would like to get the stimulus plan going as quickly as possible. The Senate has passed the package, which now needs to be reconciled with the House. By the middle of this month, Obama expects the financial legislation will be on his desk.

Geithner revealed the massive rescue effort only moments before Obama told an audience in Fort Myers, Florida, that "the situation we face could not be more serious". The city is among the hardest-hit in the storm of home mortgage foreclosures sweeping the nation.

The president, moving into his fourth crisis-laden week in office, used his first White House news conference on Monday night to warn Congress that it risked turning "a crisis into a catastrophe" if it failed to approve the stimulus package. While the plan made it through both houses of the legislature, it drew only three Republican votes in the Senate and none in the House, a major rebuff to Obama's vow to take the partisan heat out of the US political process.