Sunday, September 28, 2008

Uber-Bailout Weekend

Lawmakers have reached an agreement on the the $700 billion bailout bill, which is expected to go to a vote tomorrow. Although filled with many provisions to "protect the taxpayer" and offer relief to borrowers in danger of losing their homes to foreclosure, the bill grants significant discretion to the Treasury to determine pricing of the assets. The Treasury has 45 days to issue guidelines on the composition and pricing of assets the government intends to buy. Meanwhile, 45 days is nearly a lifetime in this market. Banks and lenders are dropping like flies all over the world. B&B, the UK mortgage lender that was instrumental in financing the housing boom in the UK, was nationalized this weekend. Fortis NV, recieved $16.37 billion in loans from The Netherlands, Luxembourg and Belgium after BNP Paribas and ING walked away from buying the company. Germany's Hypo Real Estate Group may need a rescue by German banks this weekend. In the US, the Wall Street Journal is reporting that Wachovia is in advanced talks to sell itself to either Citi or Wells Fargo. The Journal article states that the government is involved in negotiations, without offering details of which agency is brokering the deal. I suspect that if the government is involved, Wachovia shareholders will not be getting a premium for their shares. Wachovia had stated several times last week that it had ample liquidity and didn't need to hurry to do a deal. Of course, WaMu was making the same hollow claims the day before it was seized by the FDIC. A deal will most likely be struck before the opening bell tomorrow morning.
What to make of all the frantic activity over the weekend? Clearly, the credit contagion is spreading rapidly and taking the weakest players down in a furious wave. It seemed as if the market had grown accustomed to one, maybe two banking failures, conservatorships, or shotgun mergers in a weekend. This weekend we had three bailouts in Europe and one probable takeunder in the US. Is this bailout plan really going to make a difference? By the time it is implemented, we'll have three banks left and the central banks around the world will already own the rest. If Mr. Paulson doesn't get the plan off the ground soon, he'll find it's too late to buy the assets because the government will already own them.

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