Interest Rate Roundup

Monday, October 13, 2008

Global coordinated action to ease the credit crunch

As has been the case for the past several days, I am very busy today. And of course, this past weekend was another busy one for governments around the world. Political leaders and top economic policymakers gathered first in Washington and later in Paris to come up with plans to stem the bleeding in the global credit and stock markets.

The result of the weekend powwows?

* The U.K. is committing roughly $64 billion of its taxpayers’ dollars to prop up the leading banks in that country. Royal Bank of Scotland, HBOS, and Lloyds TSB get the cash infusions; the U.K. government gets board representation, the right to halt dividend payouts, and the ability to limit executive bonuses. Two of the three CEOs involved are being shown the door.

* Germany’s government is offering $681 billion in loan guarantees and capital infusions to institutions there. Spain is planning to guarantee bank debt of up to $136 billion, and setting up a fund that would buy as much as $68 billion in assets from financial institutions. Other countries in Eastern Europe are working on their own crisis management plans.

* Australia is guaranteeing all bank deposits there for the next three years. New Zealand is expanding a securities lending program it has in place. Last but not least, the U.S. Fed, the Bank of England, the European Central Bank, and the central bank in Switzerland are going to offer unlimited dollar loans in a series of special auctions.

Here in the U.S., officials from Treasury provided a bit more detail about how the TARP and other programs will be implemented. From the Washington Post:

"The Treasury also is defining the limitations on executive pay required by Congress. Those requirements will not affect all of the financial institutions that the government helps, however.

"Under the legislation, the most stringent executive pay regulations affect a financial institution only when the government makes a direct purchase of a troubled asset from that institution and acquires in return an equity or debt position.

"No executive pay rules are called for when the government merely insures a troubled asset.

"When the government buys "troubled assets" from a financial institution through an auction, the law only requires that no new "golden parachute" contracts be offered to executives.

"There would be different standards for each" type of government assistance, he said.

"Kashkari's remarks provided new details about how the bailout package will be put into practice. Along with purchasing from banks the larger and more complex assets known as mortgage-backed securities -- many of which are troubled because of homeowner defaults on the underlying mortgages -- Kashkari said that regional banks may need help through the purchase of individual mortgages.

"Regional banks are particularly clogged with whole residential mortgage loans," Kashkari said.

"A team at Treasury is working to set terms for how to identify, price and purchase such loans from those institutions. A new program to insure troubled assets is also being developed. The effort would allow banks to rehabilitate some troubled assets with the confidence that they are ensured against losses."


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