The Bald, The Beard & The Ugly (Inside Job, The Movie)

This was posted back in November 2008, and published in StarBiz as well. Well, they finally made a movie of the subprime mess. It was superbly done, I must say. Matt Damon was the narrator. I loved the many interviews, especially the ones fronting for the bad guys twitching and lying through their teeth ... Funny thing was, the bad guys are not just your usual suspects, they included many economist professors of high regard.

To watch the movie and to read my dated posting, I think I should have made the movie myself... lol.

I was watching the uncomfortable grilling by the US lawmakers on Ben Bernanke and Henry Paulson on the US rescue plan. Pity those two guys. They are trying to fix a problem which was inherited and they have to suffer the embarrassment of trying to persuade the lawmakers to approve the funds.

But who really are the culprits that brought about such a calamity? I shall try to ascribe blame to the relevant parties. But please note, it’s a highly subjective issue and everyone has a different opinion. Here’s my two cents worth (and rapidly diminishing two cents in value):

The blame game:

30% - Management of Investment Banks & Mortgage Lenders

They were greedy and overpaid. They had thrown risk management out the window. When the going is good, they pocket more than their fair share.

Paulson (left) and Bernanke could have tried to reverse the damage in their early days as they basically inherited a huge problem.– AP

The worst punishment they got was to walk out the door with nary an apology. The vast amount of liquidity in the system and the thirst for mortgages prompted them to “invent” new fangled instruments to package these loans and resell them, with little regard to the leverage effect.

Lenders kept pushing adjustable-rate and subprime mortgages, while investment banks bundled millions of risky loans and resold them to investors.

It was when these investment banks started to buy these same instruments that they really decimated their capital.

15% - Alan Greenspan

He will continue to deny it was his doing, but since 2001, he advocated lowering interest rates and continued a strong money supply growth policy.

That prompted the public to buy properties and even speculate in them. Greenspan was well known for lowering rates aggressively to counter any crisis €“ the query was that by doing that markets were never allowed to adequately correct the imbalances.

This led to the credit explosion.

He must have noticed the deterioration in the credit market back in 2003 and 2004 or was just plain blind. But he hadn’t warned lenders of using the “non traditional mortgages” now seen as a precursor to the credit crisis which unravelled as early as December of 2005, shortly before Greenspan resigned.

The excessive liquidity in the system was not just owing to the Fed’s measures. Major central banks were guilty of pumping vast amount of money supply into the system. Back in 2004, Greenspan opposed tougher regulation of financial derivatives, and actually praised adjustable-rate mortgages and refinancing for homeowners.

35% - Ratings Agencies

They are the unwitting culprits. (I am being nice here). They rated loans and bonds based on these mortgages AAA status, which caused many buyers to believe in their assurance that they were buying solid AAA papers.

The ratings agencies again acted too late to downgrade these papers €“ long after the damage is done.

They had earlier accorded high ratings and analysis which fuelled interest in these instruments to be hawked to unsuspecting investors. It is also this that led the investment banks to boldly pile up these instruments.

What kind of value-added analysis are the issuers paying these rating agencies for? It’s obvious that the analysts knew that a bulk of the packaged loans consisted of subprime.

Were the fees too enticing? Were the ratings agencies trying to curry favour with the banks? If these agencies cannot do their jobs without fear or favour, then how can investors rely on these ratings?

Maybe the US should empower the government to rate bonds, especially if the government requires certain kinds of fund managers to own only officially-rated bonds.

15% - The Regulators

The financial markets and the various instruments have their respective regulatory units.

You may include the Fed, the CFTC (Commodity Futures Trading Commission), the SEC (Securities and Exchange Commission), FDIC (Federal Deposit Insurance Corp), even the FASB (Financial Accounting Standards Board) into the fold.

They are supposed to regulate and oversee the markets and the financial instruments.

But where was the voice of reason? The last six years’ housing and subprime mortgage bubble and bust had little to do with excessive government intervention.

Instead, they had all to do with the lack of any basic sensible government regulation of the mortgage market.

They should have instituted new guidelines and rules to govern these CDOs (collateralised debt obligation), credit default swaps, and the leverage aspect of financial firms and their capital at risk.

Even now, they are mainly silent.

5% - US Treasury chief Henry Paulson & Federal Reserve chief Ben Bernanke

They could have tried to reverse the damage in their early days as they basically inherited a huge problem.

But only now, they are talking about having proper mechanisms to regulate derivatives and new instruments. Sigh.

There were institutions and people appointed to do these jobs; it’s just that they did not do their jobs properly. I am still waiting for some of the culprits to be prosecuted for what they did or didn’t do.

At the end of the day, it appears that what some of them didn’t do would be more punishable.

“But what about the American borrowers/homeowners,” you ask? Shouldn’t they too shoulder some of the blame? I left them out of the above equation for various reasons listed below:

a) I do think there should be an element of “personal responsibility” but it seems to me that they are already paying the cost of their foibles. Many have had their homes foreclosed, they have lost their deposits and payments made on these loans.

It seems to me, they are THE ONLY group that has actually “really lost” materially and has been punished.

b) The bailouts do not really bailout the end borrowers. They simply extend the life of the companies.

Maybe the bailouts will allow the companies more time to foreclose these properties in an orderly manner. Very few of those will be able to renegotiate their existing loans on decent terms to allow them to continue to fund their mortgages.

Most of the loans were priced at a time when property values were at least 30%-40% higher than now. Perhaps, it’d be better to declare bankruptcy than to continue to reconfigure the loan?

c) The public are not equipped to regulate themselves. That is why there are agencies created with “capable people” to regulate and monitor the markets.

You cannot expect the majority of borrowers to understand in detail CDOs, credit default swaps, or whether the brokers are leveraging themselves to the hilt.

You instead get assurance from top ratings agencies that brand certain papers as top notch grade. Who will really pore over hundreds of pages in a report, examine if these debt papers/bonds consist of thousands of small mortgages spread out over the country or how to value the price trends and affordability ratios of borrowers?

d) The public often acts in herd-like mentality and like most people, they are driven by the pursuit of wealth.

They see people making 50% in two years from speculating in properties and they, too, want to be part of it. Then they apply for loans, and were probably even more shocked that mortgage lenders were more than willing to lend to them.

The markets are often characterised by bouts of insanity; if you stir them up with enough incentives and carrots, people will act irresponsibly.

The regulating agencies are there to ensure an orderly market and to quell excesses. The people cannot do it themselves.

The ones who got out early will think they are very smart. The ones who got hit will think they were unfortunate victims. Both are wrong in their perception of their actions, financial decision making and brain power.

Both groups are closer to each other in every aspect than they would care to admit. It’s like a game of financial musical chairs “ the winners and losers are those who act the fastest/slowest when the music stops“ not how smart you are.

PS: In case you haven’t figured the headline out: The bald, the beard & the ugly are Paulson, Bernanke & Greenspan.

p/s photos: Ema Fujisawa (my date in Tokyo)

Update On Fate Of Citigroup

This is probably not a politically correct joke, well not really a joke as it actually did happened, but hey....loosen up. A private banker called up a client telling him that Citi was a great buy below $5. The client half-jokingly said, "What, you kidding, I'd never buy an Indian bank". I guess its not just Vikram Pandit but a huge layer of the bankers at Citi happen to be Indians - I told you it was not politically correct!

Anyway, some updates on the probable fate of Citigroup. The shorts are doing it to Citi, make no bones about it. Will Citi go bust? Very unlikely. The bank has $2 trillion worth of assets, the question mark is how much will have to be written down. Hence even below $20bn in market cap, Citi may not find buyers for the whole bank unless they come with Treasury backing and guarantees.

Citi has kind of been off the radar when Lehman and Bear Stearns were collapsing because of their strong deposit base, in particular from outside of the US. It has some $880bn in deposits, but the scare over the last few days probably would have seen at least one third of those deposits being pulled out. I doubt very much Citi can function without some kind of help over the next few days.

The interesting bit was that the company bought back $17.4bn in assets it could not offload under the SIV. If you were really in trouble, would you do that as a priority? Citi saw Alaweed upping his stake from 4% to 5%, that didn't help. Citi got a $25bn injection from TARP, that seems to be insufficient. The estimated further writedowns over the next 3 quarters could come up to another $50bn. Take that with a much reduced deposit base, and Citi would find it very hard to raise funds or have sufficient capital to do business. While HSBC or even Royal Bank of Canada would have the muscle to buy Citigroup now, none will try as they will not get any special treatment from the US.

For JP Morgan or Morgan Stanley to buy, they would probably only do it with guarantees from the Treasury. Following the hoopla over the deal with JP Morgan and Bear Stearns, I doubt the Treasury would want to take that path again.

A seizure by FDIC would be bad news generally as Citi would be broken up and sold in parts. A most likely scenario now would be for Treasury to become the majority shareholder of Citigroup by pumping in at least another $50bn in exchange for new shares. Taking a leaf out of UK's experience with Royal Bank of Scotland, that seems to work. Treasury could then slowly sell down its stake when Citi gets out of trouble a few years down the road.

As it is, Citi is a unique animal. Its reach is far and wide. If it was Bear Stearns or WaMu, nobody outside the US would bat an eyelid. But mention Citigroup, it trades and do business with almost every corner of the globe. The international pressure on Paulson and Bernanke to "save" Citi would be overwhelming. If that route is chosen (as I think is most likely), we should see it trading back at $10 minimum, thanks also to the short squeeze on the shorts. For the time being, that seems to be a realistic solution.

p/s photo: Nozomi Sasaki

FDIC Insures GE Capital's Debt

A follow up to the auto sector and hedge funds write up:

General Electric said Wednesday that the federal government had agreed to insure as much as $139 billion in debt for its lending subsidiary, GE Capital. This is the second time in a month that G.E. has turned to a federal program aimed at helping companies during the global credit crisis.

Until September, GE relied on selling commercial paper to obtain more than 15% of the funding of the finance unit. But investors began shying away from commercial paper after Lehman Brothers Holdings Inc. filed for bankruptcy protection and several other big financial players struggled. GE has said it would reduce its reliance on commercial paper, but it wasn't clear how the company would replace that funding.

GE Capital is not a bank, but granting it access to a new program from the Federal Deposit Insurance Corporation may reassure investors and help the lender compete with banks that already have government-protected debt, a G.E. spokesman, Russell Wilkerson, told Bloomberg News.

“Inclusion in this program will allow us to source our debt competitively with other participating financial institutions,” Mr. Wilkerson said. Joining the program could make it easier for GE to issue new debt in coming months. In recent months, investors have worried about GE's liquidity, and the price it has to pay to borrow money.

The F.D.I.C. program covers about $139 billion of G.E.’s debt, or 125 percent of total senior unsecured debt outstanding as of Sept. 30 and maturing by June 30. GE said Wednesday that under the program, the government will guarantee as much as $139 billion in long- and short-term debt through next June. But, Mr. Wilkerson added, "This does not mean that GE intends to issue this amount of debt."

With roughly $600 billion in assets, GE Capital is as big as some large banks. The finance unit last year supplied almost half of GE's profit. But GE Chairman Jeffrey Immelt this September said he would shrink the unit in response to the credit crisis. GE Capital issues loans for everything from aircraft engines to commercial real estate and restaurant equipment.

G.E.’s finance businesses are able to seek F.D.I.C. debt coverage because its GE Capital subsidiary also owns a federal savings bank and an industrial loan company, both of which already qualify. Last month, G.E. started using a new Federal Reserve program aimed at reviving demand for the commercial paper for a wide variety of companies.

Looks like the Treasury and Fed are making all the right moves and pushing the right buttons so far.

p/s photo: Nancy Wu Ding Yan & Sharon Chan Mun Chi

An Improved Plan By Paulson

Nov 12, Paulson on TARP priorities going forward: "First, Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions. Second, the important markets for securitizing credit outside of the banking system also need support. Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt. Third, we continue to explore ways to reduce the risk of foreclosure. " Treasury Secretary Henry Paulson said Wednesday the $700 billion government rescue program will not be used to purchase troubled assets as originally planned. (Finally, some sensibility because buying the troubled assets will not help. If you buy at the market prices, it just means the banks will have to write down the losses with no hope of recouping them. This does not help shore up capital, which is what they need. To shore up capital the Treasury will have to buy them at a premium, which is no good also as it will lock the government into owning toxic assets, or the taxpayers actually owning them at a premium, whereby they could end up with huge losses.)

Paulson said the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending. (That is a more sensible way. By owning stocks and maybe even sit on management committees of banks, they can hasten the lending part.)

He announced a new goal for the program to support financial markets, which supply consumer credit in such areas as credit card debt, auto loans and student loans. Paulson said that 40 percent of U.S. consumer credit is provided through selling securities that are backed by pools of auto loans and other such debt. He said these markets need support. "This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said.

The administration decided that using billions of dollars to buy troubled assets of financial institutions at the current time was "not the most effective way" to use the $700 billion bailout package, he said.

The announcement marked a major shift for the administration which had talked only about purchasing troubled assets as it lobbied Congress to pass the massive bailout bill.

Paulson said the administration is exploring other options, including injecting more capital into banks on a matching basis, in which government funds would be supplied to banks that were able to raise capital on their own. (This is smart. By voicing this out, it would theorectically DOUBLE the amount of capital injection, putting some onus on the banks to look for funding elsewhere as well. Instead of just $500bn of capital, suddenly it becomes $1 trillion. If banks are desperate, they will act fast. The source of capital will have to be largely from sovereign wealth funds. The fact that its on a matching basis should be an easier pill to swallow with the Treasury riding alongside them.)

p/s photos: Nozomi Sasaki

Investment Banking Bonuses To Be Slashed

Bloomberg: U.S. taxpayers, who feel they own a stake in Wall Street after funding a $700 billion bailout for the industry, don't want executives' bonuses reduced. They want them eliminated. President-elect Obama cited the program at his first news conference on Nov. 7, saying it will be reviewed to make sure it's ``not unduly rewarding the management of financial firms receiving government assistance.''

While year-end rewards are likely to decline with a drop in revenue this year, industry veterans say that eliminating them risks driving away the firms' most productive workers.``There are instances where bonuses are justified, deserved, and in the best interests of the investment bank involved,'' said Dan Lufkin, a co-founder of Donaldson Lufkin & Jenrette Inc., the investment bank acquired by Credit Suisse Group AG in 2000. ``Your very best people are people you want to hold, and your very best people will have opportunities even in this environment to transfer allegiance.''

The companies, which set aside revenue throughout the year to pay bonuses, haven't commented on plans for year-end awards, typically decided this month or next. A study released last week said the firms are likely to cut bonuses for top executives by as much as 70 percent. Cuomo is expected to go through the bonus proposals from these investment banks, and is likely to cut the bonuses a lot further to appease the public's fury. I think Cuomo could further halve the actual bonuses.

``Even really sober people are saying this is the worst financial crisis since the Depression, and they're saying bonuses are just going to be reduced?'' said a 53-year-old retired merchant marine in Seattle. ``Oh my God, you read that and your jaw drops.''

Wall Street firms' pay has traditionally been tied closely to performance of the companies, which is why employees receive most of their compensation at the end of the year after final results are known. Depending on seniority and performance, bonuses for traders, bankers and executives can be a multiple of their salaries, which range from about $80,000 to $600,000.

The nine banks that was pressed to detail their bonus plans asked for more time to respond. They've been granted an additional two weeks. The original deadline was yesterday.

Goldman, the largest and most profitable U.S. securities firm in the world last year, paid Chief Executive Officer Lloyd Blankfein a record $67.9 million bonus for 2007 on top of his $600,000 salary. That was justified, he told shareholders at the company's annual meeting in April, because of Goldman's superior financial results. ``We're very much a performance-related firm,'' he said. ``If those results don't come in, I assure you at Goldman Sachs you won't see that compensation.''

Goldman's profit is down 47 percent so far this year and five analysts expect the company to report its first loss as a public company in the fourth quarter that ends this month. The stock price has dropped 67 percent this year and Goldman received $10 billion from the U.S. government in the bailout last month.

``The executives in companies that get bailout money should have their base salaries reduced by 10 percent for 2009 and they should pay back a substantial portion of their 2007 bonuses to the government for the financial devastation they oversaw, fostered and, in some cases, directly caused,'' said a 57-year-old lawyer in Baltimore. ``Their sense of entitlement is appalling.''

In addition to Goldman, Morgan Stanley and Citigroup, the companies that received the first round of money from the U.S. government's Troubled Asset Relief Program were Merrill Lynch, JPMorgan Chase & Co., Bank of America Corp, Wells Fargo & Co., State Street Corp and Bank of New York Mellon Corp.

Some needed the money more than others. Citigroup and Merrill haven't been profitable since early last year. Earnings at each of the other firms, except Boston-based State Street, have been dropping.

``Bonuses and severance packages will obsess the American public'' and become ``a humiliation and embarrassment,'' said Arthur Levitt, a senior adviser to the Carlyle Group, former chairman of the Securities and Exchange Commission, and a board member of Bloomberg LP, the parent company of Bloomberg News. ``Compensation committees, believe me, are paying close attention to this.''

Several of the companies -- including Citigroup and Wells Fargo -- have said they won't use federal funds to pay bonuses. That's disputed by some. ``The argument of saying we're not using the bailout money is just crap because money's fungible, money's money,'' said Crystal, who writes the newsletter graefcrystal.com. ``It exposes them to ridicule.''

The bailout is only part of the reason that people object to Wall Street bonuses this year. The financial industry worldwide has taken more than $690 billion in writedowns and credit losses this year and cut more than 150,000 jobs. A decline in lending has caused the wider economy to contract: the U.S. gross domestic product shrank at a 0.3 percent annual pace in the third quarter, consumer spending fell at its fastest pace since 1980 and unemployment jumped to 6.5 percent, the highest since 1994.

Attention is most focused on the top executives at the banks that are receiving federal money. They'll have to take the steepest pay cuts because their pay is disclosed in proxy filings, according to Alan Johnson, managing director of Johnson Associates, the compensation consulting firm that estimates bonuses will decline between 10 percent and 70 percent. ``I'd advise the CEO to say he can't take anything if it's one of these firms getting bailed out by the government,'' said Crystal. ``I think he's just going to have to go down to just his salary.''

That's probably not the case for employees whose pay isn't disclosed, even those who get bonuses that exceed $1 million. Top performers should receive bonuses this year or companies risk losing their best workers. Of about 600 people who responded to an online survey on the eFinancialCareers.com Web site, 46 percent said they would be unwilling to take any pay cut this year.

p/s photos: Fiona Xie

Krugman, Nobel Prize Winner, Makes Prediction

Bloomberg /SMH: The winner of the 2008 Nobel Prize for economics said the US is plunging into a ``nasty recession'' with a ``lot of suffering'' to come, even if policy makers succeed in unfreezing the credit markets. ``That's baked in,'' Princeton University professor and New York Times columnist Paul Krugman said in an interview on ``Night Talk'' with Mike Schneider to be broadcast later today on Bloomberg Television. ``There is a lot of downward momentum.'' He said a rise in the unemployment rate to 7% ``seems almost certain'' and he put the odds of an increase to 8% at ``better than even.'' The jobless rate in September stood at a five-year high of 6.1%.

Signs that the economy is falling into a recession multiplied this week with news that retail sales have fallen for three straight months, single-family housing starts hit a 26- year low and consumer confidence plunged the most on record. Krugman voiced some doubts that the steps that Treasury Secretary Henry Paulson is taking to combat the credit crisis will succeed and suggested that more might be needed. Paulson rolled out plans this week to use $US250 billion of taxpayer funds to purchase stakes in thousands of financial firms to try to halt a credit freeze that threatens to bankrupt companies and hammer the job market. ``It's not clear there's enough money,'' Krugman said.

He added that Paulson may also have to insist that the banks use the money they're receiving to make new loans if the plan is to work. ``They may need to be much more interventionist than they have been thus far,'' the Princeton professor said.

p/s photos: Pevita Pearce

Getting Our Perspectives Right

(Important Posting)

The US economy is in shock. Is $900 bn enough to create a bottom for the markets? Will there be more failures in store? Will Bernanke lose all of his beard due to stress? Will Bush Junior say "thank God I'm outta here in a few weeks"? Will Paulson quit to take up the high paying CEO post at Nomura-Lehman International? Will Palin attempt to say something sensible about the bailout and end up arguing it being a strong advantage for her to have been living so close to Russia??!!? ... and on that subject if McCain is elected (vomit), and with him having a high probability of dying in office ... can Americans really accept Palin as the new President??? If McCain decides to step through the Pearly Gates during his reign as President, can the CIA/FBI whisk Palin and lock her up for a few years in a warehouse in San Francisco (they will never look for her there), and install Tina Fey as the President instead.... but I digress.

Just how bad is the US economy and the global economy for that matter. Recent events over the last couple of weeks have been hard to stomach. The uncertainty is palpable. Will we still have our jobs in 3 months time? What about 6 months time? How delayed will be the delay effect? Is there a sledgehammer hanging over me?

We need to get some perspective on the whole situation. We are like being tossed and turned by a hurricane in a teacup. We don't know where we are, or whether we will get out unscathed. A simple way to make some sense of the whole thing is to look at the price of oil. Oil is still the engine of the global economy. Its a brilliant indicator of the pulse of the global economy, although there have been bouts of excessive speculation which may have distorted prices somewhat but as an indicator it is still very useful.

We can say that the US economy and some parts of the gobal economy have been trying to factor in the weakness and potential recession everywhere. Things look pretty dire and bleak. Pessimism rules the day. In fact we may even argue that investors in general are trying to discount more than what is necessary in all assets. With all that doom and gloom, the price of oil has fallen from artificial high of $147 to just $93 or thereabouts.

At current levels, many industries are breathing a huge sigh of relief. Mind you OPEC has not cut production, and the major hurricanes in recent months did not disturb production. Even the Iran-Israel thing did not boilover yet. Hence supply is more than adequate ... and yet despite the streams of bad news on the US economy, global economy, contagion effects, demand destruction ... the price of oil is at $93!!!???

What is so significant about $93? A year ago the price of oil was at $70 ... now compare the economic conditions a year ago and now ... why are we still at $93??? When oil burst through $100, its mainly a dramatic repricing of oil to the "real cost of finding oil over the next 10 years". At $70 and below, the global demand growth, the new economic order, and the cost of finding oil all combined to push the price of oil to a new "sustainable rate". More importantly is the growth of the global economy.

The world is no longer that dependent on the US. In 2000 till today, the entire global economy has grown by 70%. Seventy percent!!! Much of the growth came from globalisation and the emerging middle class consumers from emerging markets. Year on year, the global economy has been expanding like an enlarging circle, and at the same time diminishing the influence of US on the global economy.

I am in now way saying the decoupling is on. In fact, the decoupling never really happened. Thanks to globalisation, all market are closer than ever before. Just look at ALLL Asian bourses, all of them have lost a lot more in value since the beginning of the year THAN the Dow or S&P500!!! Where is the bailout again? I think it was in the US ..., and why then have Asian markets lost an arm and a leg in the process? Asia as a whole have tried to discount (and over discount) the ill effects of the American dream turning into an American style-horror-movie nightmare.

Emerging markets have MORE than discounted the ill effects. Bailouts passed. Don't know if these bailouts are sufficient. BUT THE PRICE OF OIL IS AT $93. That should tell you something about the underlying global economy. Same time last year it was $70, which is to say with the weight of the world on Atlas shoulders, the price of oil is still up 33% year on year.

Can you imagine if we did not have all the bad news??? The commodities run is not over by a mile. The global economy is more resilient than most would like to think.

p/s photos: Sammi Cheng (as I will be traveling over the next 2 weeks, the postings may be erratic or even under the influence ... )

TARPaulining All Over

I think they got the name wrong in the first place, that's why it did not get passed. TARP or Troubled Asset Relief Program, it sounded like tarpaulin, the heavy duty netting for lifting heavy goods onto the ships ... no wonder la, the safety net has too many gaping holes in them.

1) Seriously, this will bring back a tighter plan, one that is more accountable and responsible - so, gotta be good right.

2) The original plan did not specify at what price levels will the fund buy the distressed assets at. If they are buying at market, its no use to the banks and financials because it does not add to their capital base. Its the capital that needs to be enlarged. Hence they have to buy at higher than market prices for the whole thing to make sense, or don't buy the assets but give insurance for the assets as a major comfort factor.

3) The biggest obstacle has to be that the naysayers do not want the fund to buy these assets.

4) The release in batches is good to maintain a sense of integrity to the whole process. Shows that the team is managing the lending/injection well before given new parcels of fund. $250bn first, then another $100bn if results are positive. Plus the government will have the option to block the remaining $350m. This will send the message of more accountability at all levels.

5) The other message to the markets is that the US government will NOT just roll over in any future financial crisis. The major financial firms will now know that they cannot simply knock on the doors of Fed or Treasury to help them get rid of the mess they may create in the future. That is very clear.

6) There probably will be structured equity exposure to companies that take money from the fund as the fund is likely to be paying higher than market prices for the assets.

7) The mark to market accounting may be the pink elephant in the room. The rule may be suspended for the time being so that financials which sell those assets may not need to write down the full amount, which would have reduced their capital availability. The rule may be suspended till 2010 (when the fund expires) but only for those instruments affected and taken up by the fund. This seemingly inane accounting move actually may lift the gloom and difficulty of rescuing the affected companies brilliantly by just the stroke of an accounting entry.

All in, its actually not that bad that the bailout fund was voted down, although I did not expect that at all. A tighter second plan will send the right message and drill down on proper and responsible restructuring plans and ramifications. The fact that major equity markets may have lost 5%-8% may actually be good. When the second plan is approved, regaining just 3%-4% of what was lost may then be a big sigh of relief. Still, its a very long road for equities in general. Not yet to get back in.

p/s photos: Mami Yamasaki