News & Current Affairs

November 25, 2008

US Fed unveils new $800bn rescue

US Fed unveils new $800bn rescue

A US home that has been repossessed

The Fed’s aim is to prevent a deep economic slump

The Federal Reserve is to pump $800bn (£526.8bn) into the markets in another bid to deal with the financial crisis.

The US central bank said it would use $600bn to buy-up mortgage-backed securities to help encourage lending.

Separately the Fed also unveiled a $200bn plan to help unfreeze the consumer credit market.

As the credit crisis has deepened, banks and other financial institutions have been reluctant to lend, deepening the economic slowdown.

Under this new rescue plan – which is in addition to the already-announced $700bn bank bail-out – the Fed is to buy up to $100bn in debt from the troubled mortgage giants Fannie Mae and Freddie Mac.

The central bank said it would also buy another $500bn in mortgage-backed securities – pools of mortgages that are bundled together and sold to investors.

New bail-out

The $600bn effort on mortgages came as the Fed also unveiled a separate program to help unfreeze the consumer debt market.

The central bank said it would lend up to $200bn to the holders of securities backed by various types of consumer loans, such as credit cards and student loans.

The Fed said that the $600 billion effort to support the mortgage market was being taken to reduce the cost of home mortgages and increase their availability.

It said the purchases of the mortgages and mortgage-backed securities would take place over a number of months.

The severe financial crisis that is rocking global markets at the moment began more than a year ago with rising defaults on subprime mortgages, loans provided to borrowers with weak credit histories.

‘Unblocking credit’

Recently, Treasury secretary Henry Paulson had indicated that the government was working on this new program, which will be supported by $20bn of credit protection provided by the existing $700bn bank bail-out fund.

The news of this latest massive financial rescue plan was generally welcomed.

“They are getting to the heart of the problem, it’s clean, it’s quick, it’s direct. It’s a good way to bring down mortgage rates, because at the end of the day they have to stabilise the housing market,” said Todd Abraham of Federated Investors, Pittsburgh.

Robert Macintosh, chief economist with Eaton Vance, Boston, said: “If they can pull it off it’ll make some people happy, but I don’t know how effective it’ll actually be.”

Scott Brown, chief economist at Raymond James Associates, Florida, said: “Here is the Fed taking a bunch of debt out of the market, which doesn’t hurt. I think it should it should help unblock the credit markets.”

Advertisements

October 2, 2008

US markets wary over rescue deal

US markets wary over rescue deal

Wall Street trader

The markets remain nervous

US shares have fallen sharply with investors cautious over whether the House of Representatives will back the revised bank rescue plan.

The House is due to discuss the scheme later, with a vote expected on Friday. The bill successfully passed through the US Senate on Wednesday.

On Wall Street, the Dow Jones index was down 263 points or 2.4% at 10,571, a slide dragging European shares lower.

The falls came as France said it would host a summit on the financial crisis.

The UK’s FTSE 100 closed was down 1.8% to 4,870.3 points while Germany’s Dax index shed 2.5% and France’s Cac 40 lost 2.3%.

Sentiment was further hit by glum economic data – showing that the number of people filing for new unemployment benefit claims rose to a seven-year high, while factory orders had seen a steeper-than-expected drop in August.

European talks

The office of French President Nicolas Sarkozy said the special meeting on Saturday would discuss a co-ordinated response to the financial turmoil amongst European members of the G8 ahead of a meeting of world finance leaders in Washington next week.

UK Prime Minister Gordon Brown is due to attend, together with German Chancellor Angela Merkel, Italian Prime Minister Silvio Berlusconi and European Central Bank President Jean-Claude Trichet.

Investors are still concerned about the efficiency of this rescue plan and how it can help the global economy
Aric Au, Phillip Securities

But with just two days to go before the talks start, EU members are deeply divided, correspondent said.

France and Holland favor a European response to help banks hit by the credit crisis while Germany and Luxembourg believe a joint rescue plan is not necessary.

European leaders have denied speculation that they wanted to establish a unified 300bn euro ($418.4bn; £236bn) banking rescue deal along the same lines as the US plan.

The rescue idea was said to be being proposed by France, but Mr Sarkozy insisted that there were no such plans.

“I deny both the amount and the principle [of such a plan],” he said.

‘Essential’

In the US, a number of changes had to be made to the $700bn (£380bn) bail-out plan in order to help win approval in the Senate.

These include raising the government’s guarantee on savings from $100,000 to $250,000, tax breaks to help small businesses, expansion of child tax credit, and help for victims of recent hurricanes.

President George W Bush said that the package was “essential to the financial security of every American”.

However, economists said doubts remained about how effective the package would be.

“Investors are still concerned about the efficiency of this rescue plan and how it can help the global economy,” said Aric Au of Phillip Securities in Hong Kong.

McCain and Obama

US presidential hopefuls John McCain and Barack Obama, who both returned from the campaign trail for last night’s Senate debate, voted in favor of the rescue plan.

Senate majority leader Harry Reid, a Democrat, said he was happy with the result and praised both presidential candidates for voting.

“I think it shows that when we work together we can accomplish good things,” he said.

Mitch McConnell, leader of Republican senators, was also in jubilant mood.

“This was a measure that was much needed, to unfreeze the credit markets and get America’s economy working again,” he said.

Create a free website or blog at WordPress.com.