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Busch: Global Actions to Stem the Tide

Tuesday, 3 Feb 2009 | 10:35 AM ET

As the global economy continues to drastically shrink, nations are aggressively pursuing policies to ease monetary conditions, stimulate the economy, and generate liquidity for their banking systems.

The major concern continues to be destruction of shareholder value via nationalizations, breaking of contract law via mortgage modifications/debt into equity cram downs, and limitations of liberty via government direction of the economy. Other than that, everything's great.

Today, he Reserve Bank of Australia cut interest rates by 100 basis points to 3.25%. The RBA noted a significant deterioration in the global economy and that the Chinese economy had slowed markedly. Also, the government announced at A$42 billion stimulus package. Prime Minister Kevin Rudd said, "Australia is facing an unfolding national and international economic emergency.....It is a strategy to which we will add in the future as is necessary." The plan includes A$28.8 billion for infrastructure, schools and housing, as well as A$12.7 billion cash payments for low and mid-income earners to be paid in March. Hmm, this sounds familiar.

Up next, Japan announced a program for the banks to help them with their liquidity issues. The export led Japanese economy is struggling with the rapid deterioration in their two largest markets: China and the US. From Toyota to Sony to Hitachi, the list of big name Japanese exporters cutting jobs is soaring. As the FT points out, "Industrial production fell almost 10 per cent in December compared with November. That’s a big number but it gets worse. The government re-did its forecasts for January to a 9 per cent drop, and February down another 5 per cent. In all, that knocks almost a third off output since September, putting it back at 1983 levels."

The plan to assist banks is to buy from them their equity shares of BBB- or better. The Bank of Japan is to buy up to 1Y trillion in shares held by banks, to buy shares until the end of 2010, to buy shares at market price up to Y250 per bank, not sell these shares in market before end of March 2012, and to complete the selling by September 2017. The critical component is the exit strategy and announcing it along with the details of the program. Something that will most assuredly be lacking from any US stimulus plan.

Finally, the US is working on it's own stimulus and bank recovery plan. As you known, the US House of Representatives passed their porkulus plan already and the US Senate is currently debating their larger version of at $885 billion. Both Republicans and Democrats want to change the House bill to redirect funds to the housing industry and increase spending on highway, mass transit, and water infrastructure projects. The CBO weighed in and said the current Senate version would be faster acting than the House bill with the majority ($700 billion) getting into the economy by the end of 2010.

The bank bailout/recovery/foreclosure assistance plan for utilizing the rest of TARP will be announced next week when Geithner speaks. With all the leaks coming from the White House and the US Treasury, I'm not sure what to believe at this point. The thrust is to share the pain of the housing collapse by creating a "bad" bank to take on toxic assets, to guarantee modified mortgages, and to reduce executive pay and install dividend restrictions for companies that receive "exceptional" government aid. The clearest warning shot of things to come came from President Obama himself when he said that further bank failures are likely and that lenders are "going to have to write down those losses."

This last statement is why everyone should be worried about what Geithner is going to say next week. Like the 1930s, I expect the US government to shut down/merge "weak" banks into "healthy" banks and wipe out shareholder value of both in the process. (The loss to IndyMac shareholders are a great example of what can happen.) The financial sector should will be under pressure until he announces the program and we find out the winners&losers.

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Andrew Busch

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