investors nervous on US bailout plan details
By Arjun Sen
New Delhi, Sep 29 (IANS) Indian investors are a nervous lot,
and say the bailout bill announced by the Congress is a much
watered down version of what was expected and is needed to
add liquidity in the system.
The Emergency Economic Stabilization Act of 2008 involves
taxpayer guarantees and ceilings on executive compensation.
The Congress is slated to vote on the bailout bill Monday,
and the Senate vote is likely Wednesday.
"There are several major points for nervousness in the
markets," said Jagannadham Thunuguntla, head of the capital
markets arm of India's fourth largest share brokerage firm,
the Delhi-based SMC Group.
"There is a lot of nervousness as also a large element
of uncertainty," confirmed Naresh Pachisia, managing
director of SKP Securities Ltd, eastern India's largest distributor
of financial products and financial services firm.
"Two years back all asset classes across the world were
moving up as there was a lot of liquidity in the system,"
"Right now there is no liquidity anywhere, so how can
you expect markets to grow?" he said.
"The first major point of nervousness is that the US
bailout plan will now be in three tranches of $250 billion,
then $100 billion and finally $350 billion and the second
and third tranches will require further Congressional approval,"
"This means effectively, only $250 billion is now available
for buying troubled assets of banks instead of $700 billion
outright," he said, adding: "This doesn't really
solve the problem of liquidity."
"The second point is that the plan requires that the
Troubled Assets Relief Program (TARM) will buy out troubled
assets but it will have to sell off these illiquid assets
within five years and earn more than the $700 billion that
will be used to buy them," Thunuguntla said.
"If at the end of five years, the TARM is unable to earn
more than $700 billion by selling off illiquid assets, then
the banks and institutions concerned, from whom the illiquid
assets are now being bought, will have to compensate the losses."
"This again really means that the problem has just been
deferred and not entirely removed and nobody knows what will
be the long-term consequences. This again does not solve the
problem of uncertainty," Thunuguntla said.
"The third major concern is that the fallout of the US
financial crisis is now appearing in the UK and Europe. Bradford
and Bingley, the largest moneylender to landlords in the UK
and a major bank in its own right has now been nationalised."
"Similarly, another major European bank, Fortis of The
Netherlands, is in trouble and is at the centre of a three-country
partial nationalisation after French bank BNP Paribus pulled
out of talks to buy it out."
The Belgian, Dutch and Luxemburg governments invested 12 billion
euros or $16.3 billion Sunday night to pick up a 49 percent
stake in Fortis.
Last year, Fortis in consortium with Royal Bank of Scotland
of the UK, and the Spanish banking giant Banco Santander,
had acquired ABN-Amro Bank of the Netherlands.
Fortis's share of the deal was $32 billion, which it had then
taken from the market as bridge finance.
"Now Fortis is in a liquidity crunch and is unable to
repay the bridge loans," Thunuguntla said.
УEven in the US, the crisis is far from over - Wachovia too
will probably file for bankruptcy if its talks with Citibank
fail, and the credit-default swap rate for JP Morgan-Chase
has shot up to $15,200 from $12,200 per $1 million credit
protection,Ф he said.
News that JP Morgan was the largest secured creditor of Lehman
Bros with a loan of $23 billion led to the rise in the credit
default swap price, as the market now believes JP Morgan will
have to simply write off that credit.
The credit default swap is a market arrangement by which a
lender can get some kind of cushion or insurance on its lending.
So the credit default swap price is a kind of insurance premium.
If anybody is lending to JP Morgan now and wants a credit
default swap it will have to pay $3,000 more for every $1
million of lending that the lender wants protected.
Meanwhile, the Financial Times newspaper of London reported
Monday that troubled insurance major AIG is considering selling
more than 15 businesses in a bid to repay the $85 billion
US government loan it had taken earlier this month.
The report said the 15 businesses included its aircraft leasing
unit, a stake in a large US reinsurer and billions of dollars
УThe repercussions are slowly emerging and nobody knows what
the final picture will look like, but I think the market will
get support at the 12,500 levels,Ф Pachisia said.
УBut there is certainly all round nervousness,Ф he agreed.
"Some Guidelines to Inner Life">>>