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Historic bailout

After frenzied talks over the weekend, political leaders in the United States have agreed on a broad plan of action to rescue the troubled financial institutions. The rescue package, costing about $700 billion, is expected to be approved by Congress within the next few days. With the money to be disbursed in tranches — the first instalment of $250 billion will be made available immediately — the U.S. Treasury will be in a position to buy the troubled assets fro m the financial institutions. The hope is that banks will resume lending and enable the now-frozen credit markets to operate freely. Bipartisan political approval to the historic and unprecedented intervention is necessary, given the magnitude of failures and the domino effect witnessed recently. However, with the U.S. Presidential elections just over a month away, any bailout plan with taxpayers’ money would have been unacceptable unless it was seen as benefitting the overall economy. Of particular concern has been the fate of several homeowners who have lost their homes or face foreclosures on their mortgages. Sub-prime loans to the housing sector have been at the root of the crisis. It is claimed that the package will enable the government, as the holder of mortgage securities, to influence loan service providers to modify some of the regressive stipulations. That falls short of suggestions to empower bankruptcy judges to rewrite mortgages so that borrowers are enabled to avoid foreclosures and retain their homes.

Even the other provisions aimed at protecting taxpayers and checking exorbitant executive compensation may not be sufficient to blunt the almost universal criticism that the government’s intervention is solely to benefit the rapacious banks whose recklessness has caused the worst financial crisis since the Depression. It has been argued that the government could recoup some of its money and even realise profit in cases where the securities earn a return. In case of loss, the participating institutions could be asked to recompense the Treasury on a review after five years. The government might also become part-owners of the troubled institutions. There are provisions for high-level regulatory and government oversight. The point needs to be made that while the present government intervention raises troubling moral questions, failure to act would have been more calamitous, leading to a financial meltdown. However, the way Asian markets responded on Monday to the rescue package announced on Sunday — stock prices dropped sharply — indicated that it has not infused the much-needed confidence in investors and, in that sense, fell short in its first test.

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