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Investor confidence at lowest ebb

As the global markets await a Congressional approval for the U.S. President George Bush’s $700 billion package for its sinking financial institutions, one can expect a further damage to the world economy in general and the markets across the world in particular.

On his part, Mr. Bush has sent out a message to markets the world-over that he was honest, had both the American and the world economy in his mind when he came out with his bailout package for the U.S. markets and that he wanted all political parties and citizens in the country to support him, at a time when the U.S. was facing an unprecedented economic crisis.

Aiming at persuading the public to support his financial bailout plan, a pragmatic Mr. Bush warned on Wednesday that the U.S. was in the midst of a serious financial crisis that could push the economy into a long-term recession if the government did not act fast even though “he and his Republican party never liked a governmental intervention in the affairs of private businesses”.

On hopes that the U.S. Congress will approve the bailout package, U.S. markets have shown some solace to investors when it closed for the week, which ended on September 26. The Dow Jones Industrial Average (DJIA) was up by 121.07 points at 11143.10 when it closed on Friday, though it fell to 10868.82 shortly after opening. Nasdaq closed 3.23 points down at 2183.34 while S&P 500 ended up 4.09 points at 1213.27.

European and Asian markets, however, closed in the negative territory for the week, indicating that the markets were not confident on the ongoing discussions and its impact on U.S. financial institutions, which were having investments the world-over.After the failure of Lehman Brothers, takeover of Merrill Lynch by Bank of America, whose share prices dipped below 20 cents in the previous week, and bailout of American International Group, U.S.’ largest insurance company, world markets woke up last week with the news that investment banks, Goldman Sachs and Morgan Stanley, were converting themselves into regulated commercial banks, stripping off their investment bank legacy. The only good news was that the legendary value investor Warren E. Buffet pumped in $5 billion into Goldman Sachs on September 23. These moves quelled massive sell-off in the stocks.

Then came the news last Thursday that JP Morgan Chase has acquired the banking operations of Washington Mutual (WaMu), the largest thrift corporation in the U.S., which was rocked by the credit crisis, in a transaction facilitated by the Federal Deposit Insurance Corporation (FDIC) for $1.9 billion. U.S. Federal regulators said WaMu had suffered an exodus of $16.7 billion in deposits since September 15, leaving the financial institution with insufficient liquidity to meet its obligations.

This is the second time the U.S. administration has gone to JP Morgan Chase as investor confidence continues to be at its lowest ebb. The 14-month-old credit default crisis that stems from sub-prime (real estate) mortgage debt is now left with no major investment bankers in the U.S. Only few days back, the U.S. Government bailed out two leading mortgage lenders Fannie Mae and Freddie Mac.

Meanwhile, Wachovia, the sixth-largest U.S. bank by assets, began preliminary talks with Citigroup, according to reports. Wachovia has assimilated distressed assets worth $122 billion on account of its exposure in the real estate mortgage.

U.S. is a divided house today on the issue that whether to spend tax payers’ money to pay for the mistakes of some Wall Street financial barons. At the same time, no one is sure this $700 billion will help bail out fully the beleagured financial institutions of the U.S. and restore confidence of the world markets. As U.S. lawmakers began reviewing a 102-page proposal, stock markets around the world fell over concern that a deal would not come as quickly as expected. But the U.S. Congress does not seem to have any other option but to approve Mr. Bush’s bailout package.

All concerned are waiting with a bated breath to see as to when Mr. Bush would get a Congressional nod for his bailout package.

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