Geithner's plan a damp squib - Views on News from Equitymaster

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Geithner's plan a damp squib

Feb 11, 2009

"Disappointing, inadequate, ill-conceived..." These were just some of the adjectives floating around in the newspapers, especially of the pink types today morning. Also, the US markets plunged yesterday with the Dow edging lower by 4%, its lowest points since end November.

And what caused all of this? Well, it was a reaction to the US Treasury Secretary Tim Geithner's new rescue plan to restart the frozen credit markets and strengthen the balance sheets of the troubled banks. Needless to say, Geithner's plan was seen as a huge letdown. Experts are of the opinion that the plan falls woefully short on both the fronts. Neither does it talk of making enough capital available to recapitalise the banks nor does it give a detailed outline of how exactly some of the toxic assets clogging banks' balance sheets will be removed.

On the former, Giethner's plan leaves around US$ 120 bn for boosting the capital of banks, an amount that many people feel will not be enough to save even one large bank let alone a few banks. Although some ideas did meet with approval, sadly, they were few and far in between. Thus, if the reactions are anything to go by, looks like the US Treasury Secretary will have to come back to the drawing board pretty soon.

When the gambler opts for a different gamble
The US Fed's strategy of lowering interest rates may not have led to increased lending just yet. But it is definitely leading to a few institutions that are heavily invested in government securities to dramatically change their investment mix. And there couldn't have been a better harbinger of this change.

As per Bloomberg, The New York State Lottery is proposing for putting a part of its US$ 1.3 bn prize fund from US treasuries to stocks, corporate bonds, real estate and hedge funds. The reason - it wants to increase the returns it gets from its reserve funds so that the huge budget deficit that is staring the New York State in the face could be reduced to some extent. If at all it gets the permission then it would be the first state lottery among the 20 largest to shift to pension fund style investments from treasuries. While the returns from stocks are of course going to be a lot more volatile, but at current valuations, it does look like a gamble worth taking. Who better to understand the same than the institution where gambling is a way of life?

Temasek's tryst with losses
Temasek, one of the most prominent government backed investment companies has had its fingers burnt poorly in the last eight months. The Singapore-government backed firm lost a whopping US$ 39 bn, a significant 31% of its holdings, as investments in financial firms like Citigroup and Merrill Lynch turned extremely sour.

Interestingly, Temasek had returned a very good 17% per year on a compounded basis between its 1974 inception and March last year. The firm joins a long list of companies across Asia and Middle East that have pumped money into banks of the developed world in an effort to replenish the latter's massively eroded capital in the aftermath of the sub-prime crisis. But most of those investments are still to make any profits.

In fact, the value of their investments continued to head southwards as more write-offs became due. This in turn led to the huge losses at firms like Temasek that we earlier talked about. The performance though is still better than the MSCI world index, which fell by 38% during the same period, handing Temasek some degree of solace.


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