Sunday, 12 October 2008

Paulson Gets Religion

So after the big bronx cheer in response to the TARP program. Paulson and Bernanke are now getting some religion about injecting equity into troubled banks (that would be almost all of the major ones). Although they can claim that the TARP program gave them special priovisions to do just that, it seems to me to be a change of direction or at least a change of emphasis from
the auction process.

Paulson Says Will Buy Bank Equity `Soon as We Can'

Oct. 10 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said the U.S. will buy equity ``as soon as we can'' in banks and other financial institutions to restore market stability and revive economic growth.

The Treasury is ``working to develop a standardized program that is open to a broad array of financial institutions,'' Paulson said at a press conference after a meeting in Washington of finance ministers and central bankers from Group of Seven countries.

The injection of equity would be aimed at sustaining banks and other financial institutions through the worst credit crisis in seven decades. Paulson declined to give a timetable or details about the purchases, and signaled that markets may be in for turmoil ahead.

Two weeks ago I talked about what I thought was one of the weaknesses of the bailout auction program, namely that it does not instill confidence in the banking system because you don't know who s going to remain standing.

If financial institutions are unsure of who is going to make it, they will continue to be reluctant to lend and thus the credit markets will remain under stress.

So with the rest of the world now scurrying about trying to present a united front at the G20 meeting in Washington, it seems that the partial nationalization of the global banking system is now well and truly on the way.

German Bailout Likely to Be Over $400 Billion

WASHINGTON -- German Chancellor Angela Merkel heads to Paris to present Sunday to her colleagues from the euro zone a financial sector bailout plan for Germany that's expected to be more than half the size of what has been enacted in the U.S.

A person familiar with the situation told Dow Jones Newswires that the government is considering a total bailout plan of €300 billion to €400 billion ($402 billion to $536 billion), which includes state guarantees and the option to get a direct stake in banks. As part of this, the government is mulling recapitalizing financial institutions by injecting €50 billion to €100 billion in capital, the person who declined to be named said.

U.K. Banks to Announce Bailout Details

Some of the U.K.'s largest banks are expected to detail early Monday their participation in a bailout plan that could force the departure of some of their top executives, according to people familiar with the situation.

The announcement, aimed for about 7 a.m., is expected to include details on how much will be raised from the government and private investors.
One plan under consideration is to shutter London stock trading to allow investors to digest the news. That plan hasn't been finalized ...

If it were such good news you would think that the stockmarkets might stay open for it, so it must be quite drastic. As mentioned previously, we are in uncharterred territory now, governments around the world are pulling out all the stops.

However, the deleveraging of balance sheets the and deflation of asset prices will continue. No doubt the stockmarket looks set to bounce sharply soon, but a dead cat bounce is all it will be.

With the stockmarkets of the developed world now down more than -40% from their highs, most are expecting that we are near a bottom. I'm hearing daily how this is the second or third worst bear market since WWII. What's to stop it becoming the worst?

Market commentators are still prattling on about how cheap the market is. It's not cheap, it's not expensive now either but it certainly isn't cheap. Forward P/E's are completely useless because you can't have any faith in what the E is. More on stockmarket valuation in the coming days.