Can the G-20 Save the World?

Referring to the United States, Luo Ping, a director-general at the China Banking Regulatory Commission said: "We know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."

Another issue that many experts believe will play a key role in overcoming the massive crisis is also absent from the agenda for the London meeting: liberating the banks from their toxic assets.

No Shared Approach

As long as these troubled assets continue to clog bank balance sheets, worldwide credit markets will remain frozen. Even though the problem is global, countries have not managed to agree on common bailout programs, let alone a shared approach. Instead, each individual government has spent the last few months puttering along on its own.

Obama's new treasury secretary, Timothy Geithner, launched the most recent bailout attempt last week, and it was apparently a success. His plan triggered a rally on the New York Stock Exchange, with Citigroup gaining 19 percent and Bank of America 26 percent. It didn't seem to matter that America's bank shares, which had once traded at premium prices, could be had for a few dollars apiece. The good times, it seemed, had returned.

Traders and fund managers were ecstatic, calling it a "win-win-win" situation and insisting that the bottom of the recession had finally been reached. Others were merely concerned that it might be "too late to get in" after the "strongest two-week rally since 1938."

But investor euphoria is premature. "Well, the stock market loved the Geithner plan, which proves … nothing," says Nobel laureate and Princeton economist Paul Krugman. The problem, according to Krugman, lies with the frozen credit markets, where there has been "practically no movement at all." Even the market-friendly Wall Street Journal maliciously laid into the freshly minted treasury secretary, noting that the best news was that he had "finally settled on a strategy."

The US government, together with hedge funds and other investors, plans to pump up to $1 trillion (€740 million) into Wall Street. This is Geithner's plan, which essentially rehashes an old idea of his predecessor, Hank Paulson.

To clean up the banks' balance sheets, Washington is offering lucrative terms to institutional investors: Anyone who purchases troubled assets in the future will be able to finance up to 85 percent of the purchase price with low-interest government loans. The government and the investor will each pay half of the remainder of the purchase price of the toxic assets.

Vast Sums with Little Invested Capital

For example, let us assume that a portfolio of mortgage-backed securities is sold at auction for $100,000. Washington and the investor each pay $7,500 in cash, while the remaining $85,000 comes from the low-interest government loan.

This sounds like a fantastic deal for hedge fund managers and other major investors, provided the plan works. Just as in the good old days, they will be able to move vast sums with little invested capital, package and shift around mortgage products, polish them up and resell them.

Page
Join the Discussion
blog comments powered by Disqus
 
You Might Also Like...