Stocks soared today as Europe, the US, and in fact Central Bankers everywhere “let it all hang out”. Please consider Europe puts more on the line for banks than US.
Europe put $2.3 trillion on the line Monday to protect the continent’s banks, a figure that dwarfs the Bush administration’s $700 billion rescue program, in its most unified response yet to the global financial crisis after a stumbling start.
The pledges by Britain and the six countries that use the euro helped soothe stock markets, along with a promise by top central banks to provide unlimited short term dollar credits.
The action by Germany, France, the Netherlands, Spain, Portugal, Austria and Britain came after weeks in which the governments often acted at cross purposes and sniped at each other — a piecemeal approach that failed to stop steep and frightening slides on financial markets.
“The time of each one for itself is fortunately over,” French President Nicolas Sarkozy said, following a Cabinet meeting that approved France’s spending in the framework of the plan.
“United Europe has pledged more than the United States,” added Sarkozy, who has taken a lead in getting the cooperation.
Europe’s biggest economy, Germany, put together a rescue package worth as much as $671 billion to shore up the country’s financial system. “We are taking drastic action, no question about it … so that what we have experienced is not repeated,” Chancellor Angela Merkel said.
Sarkozy said the French government would provide up to $491 billion to help banks, most of that in guarantees for bank refinancing. The Netherlands put up $273 billion to guarantee interbank loans.
Austria’s government offered up to $116 billion. Spain said it would guarantee up to $135 billion in a bank bond issuance this year. Portugal guaranteed $27 billion — nearly 12 percent of annual GDP — to encourage its banks to lend to each other.
Italy did not earmark a specific amount but Finance Minister Giulio Tremonti said the government would offer “as much as necessary.”
The European moves are modeled on Britain’s $88 billion plan to partly nationalize major banks. Prime Minister Gordon Brown has also promised to guarantee a further $438 billion worth of interbank loans to restore confidence in the financial sector.
U.S. Set to Buy Preferred Stock in Nine Top Banks
The Wall Street Journal is reporting U.S. Set to Buy Preferred Stock in Nine Top Banks.
The U.S. government is set to buy preferred equity stakes in nine top financial institutions as part of its new comprehensive plan to tackle the credit crisis, according to people familiar with the situation.
It’s unclear how much would be invested in each institution. The move is designed to remove any stigma that might come with a government investment.
Not all of the banks involved are happy with the move but agreed under pressure from the government.
The dramatic moves are part of a new wide-ranging effort to restore confidence to the battered banking system, following similar moves by European governments that sent global stock markets soaring.
The U.S. initiatives will likely supersede many of the government’s previous efforts. They are being formulated jointly by the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp., and ensure that the U.S. banking sector will be tied to the federal government for years to come.
One central plank of these new efforts is a plan for the Treasury to take approximately $250 billion in equity stakes in potentially thousands of banks, according to people familiar with the matter, using funds approved by Congress through the $700 billion bailout bill.
In addition, the FDIC is expected to temporarily extend its backstop from bank deposits to new funds raised by banks and thrifts for three years. That would be an aid to companies that have had a hard time raising capital without government assistance.
The FDIC is also expected to temporarily lift the insurance limits for non-interest bearing bank deposit accounts. This would extend beyond the $250,000 limit per depositor that lawmakers agreed on two weeks ago. The shift brings U.S. policy more in line with other countries that have offered blanket deposit insurance to try and prevent customers from withdrawing large sums of money from financial institutions.
To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.
I can guarantee in advance that the unforeseen consequences of whatever decisions they make, simply will not be any good. Besides, it is axiomatic that plans to rob Peter to pay Paul, can never really work in the first place, regardless of how much time is spent crafting them.
The Hombres – Let It Out (Let It All Hang Out)
The central bank response to the credit crisis was to “let it all hang out”. Unfortunately, we are in this mess in the first place because central banks everywhere, led by the Greenspan Fed, “let it all hang out”.
Mike “Mish” Shedlock
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