Monday, October 06, 2008

More Bail-Outs In scramble To Save The System

The 'bail-out' package was approved, brought into law and the Dow futures have promptly fallen 200 points leaving the Dow a smidgen off going under 10,000 points. If the main index goes below this figure it will be the first time since October 2004.

European bourses are not fairing any better as the EU governments show their usual leadership qualities by stuttering and stumbling from one cock-up to another. The Germans and French ruled out an EU-wide rescue package similar to the US last week and will look to veto any such package saying there would be no 'blank cheque' and then the Germans promptly bailed out Hypo Real Estate to the tune of 30 billion Euros.

The government and the Bundesbank came up with that old chestnut that Germany's second-biggest property lender, "is too big to fail". They met with banks and insurers in Berlin all day yesterday to discuss a revamped rescue package after private banks on Saturday withdrew their support for a 35 billion-euro rescue package brokered a week ago.

The most interesting lesson being learned from all this, to the delight of Euro-Skeptics is that when times are good the EU promotes closer economic ties, peace love and harmony but when the EU is really needed each country has employed the EFH Directive 2008.

European leaders meeting in Paris this weekend pledged to bail out their own nations' banks, while stopping short of a regional rescue effort in a classic interpretation of the 'Everyman For Himself' Directive.

This has been manifested in the most recent round of takeovers and mergers.BNP Paribas SA, France's biggest bank, will take control of Fortis's units in Belgium after a government rescue of the Brussels and Amsterdam-based company failed.

Belgium and France on Sept. 30 threw Dexia SA, the world's largest lender to local governments, a 6.4 billion-euro lifeline. UniCredit SpA, Italy's biggest bank, plans to boost its capital by as much as 6.6 billion euros and the Icelandic government is reportedly trying to arrange a 10 billion-euro injection into its banking system.

Instead of having a coordinated effort to settle savers worries countries are scrambling to give confidence. Ireland guaranteed 100% of depositors fund last weeks, this despite estimates that if the system failed the 400bn Euros required to pay depositors would by twice the GDP of the country. Talk about leverage risk!

Germany followed suit and said it would fully guarantee personal savings in a bid to ease concerns about stability.

Gordon Brown showed astonishing naivety by increasing the UK guarantee to just £50,000 from £30,000. What message does that send out?

It basically says that the extra £15,000 is all the risk the UK government is wiling to take. It points at a weakness in the UK banking system that the UK government is not prepared to underwrite. Many see this as another sign that Brown is not the man to steer us through this crisis.

Fully guaranteeing savers would have sent a message to the public and to the rest of Europe for that matter, that the UK stands behind its financial system with confidence. An increase of £15,000 has completely the opposite effect. Anybody holding money above this figure in a UK bank account must be considering a move to Ireland or Germany.

Points to watch for Dow traders this week are:

In the coming week, there are a few key economic reports, including the Fed's minutes from its last meeting released Tuesday. Consumer credit is also reported Tuesday. Pending home sales are released at 10 a.m. Wednesday, and weekly jobless claims and wholesale trade are reported Thursday. On Friday, international trade and import prices data are released.

Traders are also watching the U.S. banking sector where Wells Fargo , one of the healthiest U.S. banks, swept in with a merger offer Thursday night to beat out Citigroup's bid for Wachovia. Citigroup is protesting Wachovia's new merger deal. Its own plans to merge with Wachovia, attractive to Citi for its wealth of deposits, was brokered by the FDIC.

Bernanke speaks at the National Association of Business Economists meeting in Washington Tuesday, and Lehman Brothers CEO Richard Fuld will be on Capitol Hill answering questions on his firm's demise before the House Oversight Committee. On Tuesday, former AIG officials come before that committee.

Politician watch is the name of the game this week. Many are suggesting that the US bail-out package has come too late to stop some major problems in the market manifesting themselves in more bank failures. We will see how the politicians in Europe respond now but expect lots of back-peddling and more bold statements.

This week will be yet another roller coaster.

Good luck!

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