Monday, 23 March 2009

Vacation Time -- Back in Early April

Dear readers,

This blog will ocassionally post news and commentary during the March 24-March 31 period. In April we will be back in full fashion -- we hope so!

Thanks a lot,

Market Memorandum

Obama Unveils Plan to Buy $1 Trillion in Banks' Toxic Assets; Shares Rally Worldwide

The U.S. government finally disclosed today its long-awaited plan to buy toxic assets from the balance sheets of the country's financial system. Simply as that, they are wagering their last bet on no-banking nationalisation. As Elvis used to sing, ''it's now or never.´´ Under the plan, as reported by Reuters and Bloomberg News, as much as $1 trillion in purchases of illiquid mortgage bonds and loans will be made using Treasury money.

Says Bloomberg: ''Barely two months after President Barack Obama took office, he and Treasury Secretary Timothy Geithner are staking much of the new administration’s economic credibility on the theory that removing the devalued loans and securities from banks’ balance sheets will help them start lending again and help resuscitate the economy.´´

And Reuters says: ''Public and lawmaker fury over the bonuses, and efforts on Capitol Hill to claw them back, have made many investors skittish about partnering with the government, but Treasury specified that private partners in its latest effort to revive credit markets will not face tough executive pay restrictions.´´ The story talks about the outrageous effort by financial companies to keep paying bonuses to their employees, most of whom are seen as responsible for the havoc created through the marketing and sale of asset-backed securities tied to mortgages -- the infamous sub-prime securities.

Immediately after the announcement, Reuters came up with this excellent scoop: click here to read the story and watch the video. Bill Gross, the head of the world's largest bond fund, Pacific Investment Management Co., ''gave the Obama administration's financial stability effort a much-needed endorsement on Monday,´´ saying Pimco will participate in the public-private plan. We have said in this blog extensively that Pimco is one of the much-needed engines to make this thing work -- but at the same time it faces conflicts of interest that we hope don't derail the plan as a whole. Check the previous postings by typing Pimco on the search box (your upper-left corner, right next to the Market Memorandum big title in your screen.)

The Standard & Poor’s 500 index rose 3.6 percent; the S&P 500 Financials Index jumped almost 9 percent. Yields on the 10-year Treasury notes were down 1 basis point at 2.62 percent. The Bovespa rallied 4 percent in Brazil. The world is giving the plan an early confidence vote -- we will see how markets behave tomorrow.