A Banking Holiday for the G7? “Urgent and Exceptional” Steps

by REIT Wrecks on October 11, 2008

Intensifying solvency concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown,” Dominique Strauss-Kahn, Managing Director, International Monetary Fund, Saturday October 11, 2008

A weekend update for you: Reports are spreading that banking shares across the G7 nations could be suspended Monday as European governments attempt a coordinated, possibly last-ditch effort to implement financial rescue packages in an attempt to repair the battered global financial system. But Prime Minister Gordon Brown, looking forward to his re-election campaign, seemed to be more interested in pointing fingers than in fostering support for his government’s huge rescue plan. Perhaps this was meant to lay a smoke screen for what amounts to a massive nationalization of that nation’s banking system.

As part of the rescue, Britain plans to implement a $906 billion smorgasbord of measures intended to keep the country’s banks from failing, including sweeping government investments in the financial services sector. These investments would include limits on executive salaries and caps on shareholder returns, all of which conjures up grim visions of trying to do business at my local DMV office. You want a loan? Great. Take a number and sit down…

Included in the plan, however, is scheme to guarantee overnight interbank lending in an effort to bring down stubbornly high LIBOR, which is the rate at which banks lend to each other on an overnight basis, but which has also become the benchmark rate for many construction loans, corporate credit lines and even some single family mortgages. Stubbornly high LIBOR is at the heart of the crisis, so the extent this part of the plan is successful, it will have a huge impact on unfreezing credit.

European leaders also plan to gather in a hastily arranged summit in Paris on Sunday with expectations high that France, Germany and Italy will detail their countries’ plans to raise capital in the banking systems and ensure banks have access to funds.

German officials have let it be known that they are working on a bank recapitalisation andfunding plan worth 300 to 400 billion Euros to be announced on Sunday and enacted very quickly.

The US is also under huge pressure to announce exactly how it intends to use part of the $700bn bailout fund to add capital to banks. On Friday, Hank Paulson, US Treasury secretary, announced a “standardized” program to purchase non-voting equity that will be “open to a broad array of financial institutions”.

“We’re going to do it as soon as we can do it and do it properly and do it effectively and right,” Mr Paulson said. “Trust me, we are not wasting time; people are working around the clock to deal with this.”

Update: The Wall Street Journal is reporting that the U.S. government is weighing options on a much more far-reaching plan than previously envisioned by the first incarnation of TARP. If the U.S. moves forward with these new plans, it would be the most extensive government intervention into the financial system since the crisis began. Unfortunately, this underlines the serious problems we now face, all of which seem to keep growing by the day.

One dramatic step would be to guarantee billions of dollars in bank debt; the other plan is to temporarily insure all U.S. bank deposits.

The model for the action is the UK’s recently announced plan that it is now pitching to the G-7 members, to guarantee up to $432 billion in bank debt maturing up to 36 months out, according the Journal. “The British concept to expand its proposal to other countries has a lot of support from Wall Street and is being pored over by U.S. officials, according to people familiar with the matter,” the article said.

In other news, there was also word that Mitsubishi UFG may cancel its planned investment in Morgan Stanley and instead simply take it over. With the Treasury’s new plan to invest equity directly in U.S. financial firms, it seems unlikely that Mistsubishi will go forward with either plan.

Neel Kashkari, the Treasury official Paulson picked to manage the rescue operations, is scheduled to give a speech on Monday to discuss plans to move TARP forward.


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