Friday, September 19, 2008
US Treasury Secretary Henry Paulson has been shopping around a proposal to congressional lawmakers that would create an entity to deal with the billions of dollars of bad debt still clogging the financial system. The idea has been compared to the Resolution Trust Corp formed in 1989 to fix the savings and loan industry collapse.
The latest developments came on the first day that the US Securities and Exchange Commission's new rules aimed against abusive short selling of stock in all publicly traded companies took effect. Britain's Financial Services Authority said investors will be temporarily barred from taking new short positions in financial stocks from midnight on Thursday, September 18, which analysts said raised the possibility of a similar action in the US.
There is nothing you cannot save if you throw enough money at it. The way the Fed dumped US$180bn yesterday to provide liquidity and similar moves by central banks everywhere showed solidarity in tackling this crisis confidence.
Are assets not worth anything anymore? Why so many investment banks in trouble? There has been a freeze in credit. Inter party transactions which used to be settled a few days down the road, thereby implying a credit transaction, is not happening anymore. Banks and financial institutions are not willing to fund any kind of trades. Imagine your broker asking you to bring the money first before buying any shares. Thats what is happening. The i-banks do not have sufficient capital to bring the money first in these transactions.
Failing to resolve the situation will cause more failures, and maybe even a run on certain banks as the general public may even lose confidence with their policies and deposits.
While I can put up many reasons to debunk the RTC like bailout (which is rumoured to be in the US$300bn-500bn range), it looks like the situation cannot be left to the market forces to unravel itself.
Looking 3 years ahead, one can see a strong shift in the shape of financial giants. I can see HSBC taking the global mantlepiece as the biggest and strongest bank eventually. I see many more surviving banks and financial companents to have much higher Asian institutional owners (banks and SWF).
HSBC has taken the proposed 51% deal to buy Korea Exchange Bank off the table. Looks like they are seriously considering buying a controlling stake in Morgan Stanley.
Its not over, volatility will be there. Gold really looks very good, and I can see US$1,000 being tested this year, with room to move even higher.
China probably would have been told in no uncertain terms by all central banks to pick up the slack as the engine of growth for the global economy over the next 12 months. Can expect very rapid reductions in SRR and BLR, maybe even twice in a month, with cuts to trading tax and transaction cost. Probably will fast track the spending injection plan. China could look interesting.
p/s photo: Aum Patcharapa Chaichua