Stock Preacher

The US Treasury Department is expected in the coming week to roll out its long-delayed plan to buy as much as $1 trillion in troubled mortgages and related assets from financial institutions, according to people close to the talks. The plan is likely to offer generous subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government to buy toxic assets from banks, and to help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders. The plan is not expected to impose restrictions on the executive pay of private investors or fund managers who participate. The three-pronged approach is perhaps the central component of Mr. Obama’s plan to rescue the U.S. banking system from the unprofitable assets weighing down bank balance sheets, crippling their ability to make new loans and deepening the recession

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While bank stocks have been battered, it is the sector’s bonds and their spreads over government debt, that could provide early clues of an upturn. “The best news is that non-financial high-grade corporate debt has been behaving a lot better, but financial sector debt needs to be better bid,” said John Haynes, strategist at Rensburg Sheppard in London. He said a directional change in the iBoxx financial index, a benchmark for bonds from financial companies, was crucial. European financial bond prices have fallen almost 17% on average this year, the iBoxx financials index shows, suggesting investors are giving the sector a wide berth. Haynes said he was also watching the Platinum-to-Gold ratio. Platinum has a variety of industrial uses, notably in cars, while Gold is boosted by its safe-haven allure. The ratio of the two metals, in effect a ratio of economic growth expectations to investor fear, has moved decisively in the direction of fear. Platinum prices were double the level of gold in February last year, but now the ratio is close to 1 to 1.”You look at everything and try and work as you used to, said Fortis’ Gijsels. “But should have an open mind and understand that market internals have changed.”

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Some of the large banks in the USA may require more aid to remain solvent, say some economists and other finance experts. This is a sobering commentary on the growing mountain of losses that can overwhelm the value of the banks’ assets.”The United States banking system is effectively insolvent,” it quoted Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, as saying. He estimates that total losses on loans by USA financial firms and the fall in the market value of their assets will reach US$3.6T, up from his previous estimate of US$2T according to the New York Times last week.

U.S. Treasury Secretary Timothy Geithner unveiled a plan last week to soak up as much as US$1T in bad assets on banks’ books and expand a Federal Reserve program to support up to US$1Tin new loans. The market yawned and rolled over as experts said that in order for the US banks to resume the ample lending needed to restart the wheels of commerce, bigger, and more direct government role than in the Treasury Department’s plan called outlined. The government needs to really get in and close the weakest banks, inject capital into the surviving banks, and sell off the bad assets sooner rather then later.

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