LONDON: Bailouts, stimuli, incentives, etc. are just a few of the idioms being used by governments all over the globe to describe the serious attempts taken by them to stabilize the current economic malaises. Notwithstanding these efforts, the light at the end of the tunnel seems increasingly elusive.
The global economic meltdown has already caused bank failures, bankruptcies, plant closings, and foreclosures and will, in the coming year, leave many tens of millions unemployed across the planet, as people lose confidence in the ability of markets and governments to solve the global crisis. Economics and markets are increasingly and inextricably woven together, no matter what governments believe.
While economists now agree that we are in the midst of a recession deeper than any since the Great Depression of the 1930s, they generally assume that this downturn — like all others since World War II — will be followed in a year, or two, or three, by the beginning of a typical recovery.
The World Bank’s most recent status report, Global Economic Prospects 2009, fulfils those anxieties in two ways. It refuses to state the worst, even while managing to hint, in terms too clear to be ignored, at the prospect of a long-term, or even permanent, decline in economic conditions for many in the world.
With slight optimism — as are so many media pundits — regarding the likelihood of an economic recovery in the not-too-distant future, the report remains full of warnings about the potential for lasting damage in the developing world if things don’t go exactly right. There are also economists who are saying that they see no end to the recession in sight!
Indeed, one has just to listen to various politicians, economists, analysts, and all those pundits to sense the dichotomy in their theories and prescriptions for the true panacea to tackle these problems head-on. Governments continue to take charge but, in actuality, what more can they do?
Well, let’s start with the Troubled Asset Relief Program, or TARP. Since its introduction in the US late last year, TARP has proven to be an unpopular expenditure with the public and with many in Congress who believed financial institutions received the money with little accountability and with few strings attached.
Banking giant Citigroup has been in talks with the government about additional assistance, while insurance giant American International Group (AIG) also is seeking more relief and is working with the government to revamp its existing rescue package. In the final analysis, how much more capital they would require, will be impossible to tell.
President Barack Obama and his Treasury people have taken steps to tighten conditions on the recipients of the funds. They have allocated $750 billion bailout funds this year, a step that would more than double the direct infusion of taxpayers money into the reeling financial sector.
In essence, taxpayers would foot the entire $750 billion up front but it hasn’t been predetermined how the money would be used. It has been reported, the value of the acquired assets, suggest a return to the government of 66 cents for every $1 spent, hence the $250 billion net expenditure.
The main question remains, however: What else can the government do in case the situation deteriorates further and more intervention becomes necessary?
The need for more funds could depend on whether economic conditions worsen and on the outcome of “stress tests” now being conducted on the largest US banks. These stress tests, which started last month and are supposed to be completed by the end of April 2009, are being conducted to judge whether banks have sufficient — and the right mix — of capital to survive during a much deeper recession, and to gauge the size and scope of any future government aid.
With the stress test, I believe we would have some idea of which institutions may need to become government-owned or shut down. Those capable of passing such a test will clearly have a decent chance of surviving the recession and probably will be able to raise additional capital. In all likelihood, they will see their stock prices rally.
The quicker the stress test is performed and the reorganization of busted financial institutions completed, the sooner this phase of the financial crisis will be behind us, regardless of the outcome at various banks.
Notwithstanding the government’s honest efforts and methods, the trend is clear: Troubled loans are rising and will continue to rise in the near future and the government is trying to exercise control over troubled banks even without the large scale but minority ownerships, as alluded to by Ben Bernanke, the Fed chief. Is he thinking that the government ought to run a financial institution?
Just think of Fannie Mae and Freddie Mac!
That will lead me to address the question of nationalization that caused much anxieties in the markets. To start, the Feds do not need to seize banks as that would probably drop their equity prices trade down to near zero. However, the market and the stock exchanges are getting prepared for such an eventuality as they see it coming and are not underestimating the magnitude of the problem all the way along!
It is so ironic that the politicians who are now engulfed in finding solutions are the same ones who argued with the regulators who criticized the excessive and irresponsible banks lending in 2006 or 2007. The politicians and, to a lesser extent, the regulators, have massively failed to spot the seriousness of the risk-taking that was going on.
Government can, and should, demand information from banks, and they have the power to do so. We need to have, among other relevant action plans, a detailed and thoroughly transparent asset by asset audit of the major banks’ balance sheets and, we also need to believe and trust the regulators and encourage their openness and critique.
Only then can a government work out a painstaking strategy within a defined time frame to safeguard tax payers’ investment in bailing out troubled institutions.
(Habib F. Faris [[email protected]] is CEO & managing director of FinaVestment Ltd., London.)
