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Oh September! - Views on News from Equitymaster
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  • Sep 30, 2008

    Oh September!

    TARP goes for a toss!
    The US House of Representatives (Lower House of Parliament) has rejected TARP or 'Troubled Assets Relief Program' of the US government to bail out financial institutions. The US$ 700 bn plan that would have allowed the US Treasury Department to rescue the financial system got a thumbs down yesterday by a vote of 228 to 205. This sent the US stock markets in a tizzy, as the benchmark Dow Jones Industrial index declined by a massive 777 points (7%), it's biggest single day decline ever. The Asian markets are mirroring their US and European peers. While Hong Kong is down 2%, Japan and Taiwan are down 4% apiece.

    Warren Buffett had recently proclaimed that the financial crisis in the US was 'everybody's problem' and not just that of Wall Street. He had in fact warned policymakers that the US might face its 'biggest financial meltdown' if they did not do something to secure the financial system. Now with the bailout plan turning turtle, experts are predicting the financial system and the economy to be in dire straits. Although another version of the bailout plan will likely go before the US Congress for a vote, concerns remain that the passage of the bill could be a more drawn-out process.

    Europe goes the US way
    Just last week, when the US announced its bailout plan of US$ 700 bn to the troubled financial sector, Europe had reiterated that it was not likely to follow suit. If yesterday's events are anything to go by, Britain, Belgium and Germany at least are going the US way. According to the IHT, the Belgian, Dutch and Luxembourg governments combined chose to bail out the troubled Belgian-Dutch financial conglomerate Fortis by infusing US$ 17.5 bn into it.

    Similarly, with the British mortgage lender Bradford & Bingley being in dire straits due to its bad mortgage assets, the British regulators had to step in to rescue the same after no private buyers emerged. Meanwhile, as per reports on Bloomberg, the stock of Hypo Real Estate Holding AG was given a dressing down as the German government and a group of private banks provided a US$ 50 bn guarantee for the commercial-property lender.

    Given that Europe has also to deal with the tremors of the subprime crisis and going by reports which proclaim that the recession in the European continent is likely to be deeper than in the US, the bailout news seems hardly surprising. Having said that, the silver lining in the cloud for Europe is the fact that some of the banking behemoths such as HSBC, Barclays, ING and BNP Paribas seem to have weathered the storm for now at least. This is in sharp contrast to the US, which saw many of its top financial companies including banks and insurance companies topple like nine pins.

    In fact the credit crisis has led to the bankruptcy of Lehman, the demise of Merrill Lynch, the bailout of Freddie Mac, Fannie Mae and AIG by the government and the transformation of the investment banks Goldman Sachs and Morgan Stanley into banking entities.

    Not a month that anyone is likely to forget for a long time to come!



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