The world economies are more connected than ever before due to markets globalization. Being a largest economy, the ongoing credit crisis that initially struck United States has spread and resulted into wider economic turmoil globally. The Consumer-driven American economy is deeply hurt from massive debt burden.The biggest concern of U.S. now is the fear factor and confusion among Americans. After exploring different alternatives, any plan considered by the new government and authorities attract much uproar and blame game, thanks to the AIG bonus distribution from the bailout money, they got from the pockets of helpless taxpayers.
If AIG did act all by itself without letting people know initially, there are many not-for-good theories openly hyped by disturbed hypocrites to spread panic in desperation. Every average individual’ who loves to stay updated on current happenings, appear utterly confused and in constant fears of the catastrophic times ahead, as predicted by every Tom, Dick and Harry.
Ironically, the basic objective of critical evolution is to understand the problem, that helps in finding precise solution but what’s happening now is completely opposite.
After AIG Bonus row
After the messed up federal intervention into American International Group (AIG), an insurance giant, Both Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke, while appeared before a House committee, demonstrated a need to regulate complex non-bank financial institutions just as banks, now regulated by the Federal Deposit Insurance Corp. (FDIC). Geithner also urged for new powers to take over failing non-bank financial institutions, if their collapse might threatens the entire economy.
Recent Developments on Economic Crisis
Recently, US Treasury Secretary, Timothy Geithner unveiled Public-Private Investment programs to clear toxic assets from the balance sheets of banks, by using public and private capital to absorb toxic assets clogging the banking system. The draft proposal though would require congressional approval.
Before going forward, quickly review the term ‘toxic assets’ with an example:
Toxic Assets:
Let's assume Tom has a loan of $250,000 from XYZ Bank for a house at 5% interest. The house has considered as collateral, which means XYZ Bank can have the possession of that house, in case Tom default the payments. Under normal conditions price of the house will increase and debt of the Tom decrease with regular payments.
As XYZ Bank has mortgage document that is an asset, banks have the right to sell the mortgages if they wish. Tom will then be required to pay the mortgage to new buyer, who will get the benefit of the 5% interest. This provides easy liquidity, in case XYZ Bank needs money.
Further, in case Tom doesn’t have the money to pay the mortgage, also the house price fell sharply to $100,000 due to recession and Tom still owes $200,000, if Tom defaults now, XYZ bank can only be able to recover a portion of their money back ($100,000) and has to bear loss ($200,000-$100,000 = $100,000). The mortgage document now becomes illiquid, as the house can't payback the mortgage. That’s how any mortgage has become a "toxic asset".
Brief description of Tim Geithner’s draft proposal
Market prices for many assets held by banks/financial institutions are either uncertain or depressed and put on immense pressure in bank balance sheets, credit remains a rare commodity.
Under draft Public-Private Investment Program, Federal Reserve will partner with private investors to buy troubled securities. FDIC (Federal Deposit Insurance Corp.) will guarantee the pools of real-estate loans. The drafted partnership plan aims to lure private investors and to offload as much as US$1 trillion in bad real estate assets.
Generally banks seem unwilling to dispose of their toxic assets during falling markets because values continue to plunge rapidly. Already, some mortgage-backed securities are reportedly trading around 40 cents on the dollar, and this is driving public concern about how toxic assets should be priced.
To attract banks to offload their toxic assets under lower valuations, the offloading bank could promise to return any profits arising from the offloaded assets after maturity. Investors buy toxic assets at discount prices with Treasury aid and in the hope that they'll recover some value over time.
Despite the criticism from different quarters regarding many loopholes in Treasury proposals to remove toxic assets from banks, it actually boosted much needed optimism that the economy can recover from the looming crisis by firm strategy and real time action by the authorities. Moreover stock markets also reacted favorably the day Geithner proposal made public.
Let’s conclude
Remember Fear and Insecurity always attract attention. In present crisis that affect masses in one-way or another, people are scared and there is no ready made solution to overcome the financial disaster.
Many stories presented by the hi-tech media are full of gloom and doom or emotional outbreaks. Even the political system, is casually sparring over solutions to the economic crisis, also pointed out by Warren Buffet recently.
As many of you already read my previous posts must know that I always put emphasis on self-study and analysis, to help you to evaluate the fair conclusions. You shouldn’t believe everything you’re told. Many conclusions provided freely, may not have the same effect on everyone and are often biased or influenced by available inputs and personal emotions.
Related Links:
http://www.ustreas.gov/
http://www.federalreserve.gov/
http://www.ino.com/
http://blog.creditcardflyers.com/
Tags:
Financial Analysis Credit Crisis Markets United American Economy Mortgages Banks Fed Money Investments Treasury Debt Toxic assets AIG Timothy Geithner Public-Private Partnership Draft Planning
