DOUBTS GROW OVER US BANK RESCUE PLAN

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Doubts grow over US bank rescue plan

By Rob Lever

Agence France-Presse

September 23, 2008 07:39am

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A PROPOSED $US700 billion ($830 billion) bailout for the banking industry leaves many questions unanswered, but has prompted fears about giving the US government unprecedented power to intervene in the economy, analysts said Monday.

The plan would allow the US Treasury to sell new debt to purchase the vast amounts of mortgage securities and other "toxic'' assets that have caused a freezeup of the financial system.

Markets welcomed the announcement of the plan last week, but analysts say the sobering reality may make it highly complex to implement. Some critics say it gives unparalleled authority to the government in the finance system.

The plan is "three pages long'' and "asks for a staggering sum of money with wide-ranging powers to buy the broadest amount of mortgage-related securities with a minimal of oversight,'' said Andrew Busch at BMO Capital Markets.

"This is a huge leap of faith and I suspect that leaders of Congress and the presidential candidates will urge caution or act cautiously.''

One key question is how the government will value the dodgy mortgage-backed paper that the banking system refuses to buy.

"The Treasury did not provide much detail on how the assets will be priced, other than through market mechanisms where possible,'' said economist Brian Bethune at Global Insight.

NOTE: RECENT REPORT ON AIG HAS CAUSED MAJOR EFFECTS.

"We expect discounts on asset transactions will be anywhere from 20 per cent to 80 per cent, depending on the quality of the assets or the asset package involved.''

Some analysts point out that if the Treasury pays fair value -- Merrill Lynch, for example, sold some of its distressed securities for 22 cents on the dollar -- it could create fresh losses for banks and lead to more failures.

Mark Zandi at Economy.com said the idea was positive but may be hard to implement.

"In practice, a reverse auction for mortgage assets may be tricky to pull off,'' he said. "Auctioning mortgage-backed securities could prove especially problematic, since each security is so idiosyncratic.''

Beyond the technical questions, the plan dubbed by some as "the mother of all bailouts'' has raised hackles among some who fear it gives too much power to the government in the financial markets, especially with a clause providing immunity from lawsuits.

Robert Brusca at FAO Economics said the bailout plan "really isn't a plan and may not bail anything out ... The crux of it seems to be to dump the losses on taxpayers.'

"It gives the Treasury imperial power with respect to a simply huge amount of funds,'' said Yves Smith, a financial analyst with the website Naked Capitalism. "This is a financial coup d'etat, with the only limitation the 700-billion-dollar balance sheet figure.''

Some lawmakers also were sceptical about the carte blanche authority the proposal would give the government.

Texas Republican Representative Jeb Hensarling said lawmakers should carefully study options before approving the plan.

"Congress is being asked to support an uncertain entity, costing an uncertain amount of dollars, for an uncertain duration,'' he said.

"My fear is that taxpayers will be left with the mother of all debts, the federal government becomes the lender and guarantor of last resort, and our nation finds itself on the slippery slope to socialism.''

Despite the protests, many expect the plan to be approved to help stave off a further meltdown of the financial system with dire economic consequences.

"We were on the edge of the abyss last week,'' said Ed Yardeni at Yardeni Research.

"The question is whether so much government intervention will avert the most dreaded consequences of Wall Street's excesses, namely a financial meltdown and an economic depression .... The answer, I think is that it will work, and that the economy should grow next year.''
Economist Scott Anderson at Wells Fargo said the plan is needed even if it was imperfect.

"An economist's instincts are never in favor of a solution that puts taxpayer money and the US Treasury's finances at risk to correct the mistakes of a profit-driven industry,'' he said.

"Nevertheless, we are left with the realization today that this is a Great Depression-style financial crisis that requires a Great Depression-style solution.

"Indeed, the US government alone is the only institution uniquely equipped to deal with a problem of this magnitude. It is precisely for moments like this we have a government. Failure to act would be a failure of leadership.''

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DOLLAR FALLS AS BAILOUT PLAN ERODES CONFIDENCE IN U.S. FINANCES

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Dollar Falls as Bailout Plan Erodes Confidence in U.S. Finances

By Ron Harui and Ye Xie
Enlarge Image/Details

Sept. 23 (Bloomberg) -- The dollar fell for a second day against the yen on concern a U.S. government proposal to buy $700 billion of troubled assets will erode confidence in the nation's finances.

The greenback traded near a one-month low against the euro as Treasury Secretary Henry Paulson's plan would increase the nation's debt ceiling by 6.6 percent to $11.315 trillion. The currency also declined before U.S. reports this week that may show home sales slowed, adding to the case for the Federal Reserve to lower interest rates.

``Obviously there are genuine concerns over the sustainability of the U.S. fiscal position,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group in Sydney. ``The dollar will remain under pressure.''

The dollar declined to 105.26 yen as of 11:55 a.m. in Singapore from 105.51 yen late in New York yesterday, when it fell 1.8 percent. It traded at $1.4779 per euro from $1.4774 yesterday, when it touched $1.4866, the lowest since Aug. 22. The currency may weaken to 104.50 yen and $1.4900 in coming days, Morriss said. The euro dropped to 155.55 yen from 155.91 yen.

Foreign-exchange movements may be exaggerated because trading volumes are lower than normal due to a Japanese public holiday today, according to Morriss.

NOTE: MORRIS IS A WELL KNOWN CURRENCY STRATEGIST IN AUSTRALIA.

The U.S. currency has lost more than 6 percent versus the euro since touching a one-year high of $1.3882 on Sept. 11. The dollar reached $1.6038 per euro on July 15, the weakest since the European currency's 1999 inception.

Plotting Rescue

Paulson and Federal Reserve Chairman Ben S. Bernanke began plotting the rescue last week after New York-based Lehman Brothers Holdings Inc. filed for bankruptcy, the government seized control of American International Group Inc., and Merrill Lynch & Co. was forced into the arms of Bank of America Corp. Paulson and Bernanke testify before the Senate today on the banking crisis. The plan was sent to Congress Sept. 20.

The dollar also weakened on speculation that some U.S. politicians will oppose the passage of the government's plan, delaying the rescue of the beleaguered financial sector, according to UBS AG, the world's second-largest currency trader.

Republican presidential candidate John McCain called for limiting pay for executives of rescued firms, saying yesterday taxpayers shouldn't foot the bill for ``golden parachutes'' for officers of companies that have crumbled in the financial crisis.

The ``public is beginning to question why $700 billion in taxpayer's money is needed to bail out the banking sector,'' wrote Ashley Davies, a currency strategist at UBS in Singapore, in a client note today. ``Uncertainty over the implementation of Paulson's plan will keep the dollar on the back foot for now and clearly euro-dollar at $1.50 is in sight.''

The euro will end the year at $1.43, according to the median forecast of 42 analysts surveyed by Bloomberg News.

Carry Trades

The yen rose against 15 of the 16 most-active currencies on speculation investors will reduce so-called carry trades, in which traders get funds in a country with low borrowing costs and invest where returns are higher.

The benchmark interest rate of 0.5 percent in Japan compares with 5.25 percent in South Korea, 7 percent in Australia and 8.25 percent in Mexico, making the yen a favorite funding currency for the carry trade.

``I really like the Japanese yen,'' said Kathy Lien, director of currency research at GFT Forex in New York, in a Bloomberg television interview. ``We'll probably see the most profound weakness in the dollar against the yen just because it's a carry trade currency and a carry trade play.''

Japan's currency rose 0.9 percent to 10.91793 against the Korean won, gained 1 percent to 88.21 yen versus Australia's dollar and advanced 0.3 percent to 9.904 per Mexican peso from late in New York yesterday.

Economic Reports

Implied volatility on one-month dollar-yen options rose to 17.48 percent from 16.55 percent yesterday. Higher volatility may discourage carry trades as it suggests a larger risk of exchange-rate fluctuations that can erode profits.

The dollar also fell as home resales declined to 4.94 million last month from 5 million in July, according to a Bloomberg News survey of economists. The National Association of Realtors' report is scheduled for release tomorrow. The Commerce Department will report the next day that sales of new houses dropped to 510,000 from 515,000, a separate survey indicated.

The chance of the Fed cutting its 2 percent benchmark rate by a quarter-percentage point at its Oct. 29 policy meeting was 34 percent yesterday, compared with zero a month ago, futures contracts on the Chicago Board of Trade showed. The European Central Bank's main refinancing rate is 4.25 percent.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: September 23, 2008 00:31 EDT


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