Washington, Washington, Dc (PressExposure) February 10, 2009 -- The financial-rescue plan that Treasury Secretary Timothy Geithner is set to unveil today (February 10, 2009) could well determine how effective the stimulus will be as a whole, but the as yet unheard strategies are already dividing both bankers and investors.
For the plan to work the government will need to borrow in order to invest in things such as new business projects, credit for purchases of new cars, homes and appliances and if it can't get the money then companies and households will be unable do their supposed part, which would be to spend the economy out of its present mess.
Former Federal Reserve Governor Lyle Gramley had this to say, "We're going to get limited benefit from the stimulus program unless people can finance their normal operations and we really haven't seen any breakthrough yet in the credit logjam".
Investors are seeking a 5.2 percentage-point premium over U.S. Treasuries to buy bonds being sold by companies with investment- grade ratings which is over five times the level that it was two years ago and the rate on jumbo mortgages is 6.91 percent, almost 1% higher than at the start of 2007.
There is almost unanimous agreement that something needs to be done and done soon to get the economy out of its present doldrums but there's not much consensus on how to do it however.
Christopher Whalen, who is the managing director of 'Institutional Risk Analytics said in an interview yesterday,
"If banks can't move mortgages off their books, then we have a problem. We will see credit availability much lower" than in past generations. We have got to fix the financial system and if we don't deal with this, we will not get anything else done"
Stuart Eizenstat, who is a former deputy Treasury secretary in the Clinton administration said,
"The government will in effect put a floor under those assets. If the value goes up, the investor gets the benefit. If the value goes down, the government picks up that, but it's much less of an immediate expenditure than you would have if you purchased them. Guarantees may also play a role for investments banks intend to hold to maturity"
Furthermore, many would be investors also remain unconvinced that the government is moving in the right direction.
"It will be a bad decision for a hedge fund to invest in these illiquid assets. You'll end up running into the same problems as the banks and the hedge fund industry is suffering as it is already" announced Kenneth Windheim who is the chief investment officer of 'Strategic Fixed Income LLC', that manages $1.7 billion in assets and invests with hedge funds.
The financial rescue needs to "create an improving credit market to ensure that the stimulus works", said Bruce Kasman who is the chief economist at 'JPMorgan Chase & Co.' in New York and is a former Fed researcher.
Another possibility that officials and regulators have suggested is the setting up of a government-funded "bad bank" that would buy up most if not all of the toxic debt but New York Senator Charles Schumer said that it would be "very expensive and cost as much as $4 trillion, and risked setting values for the securities so low that every other bank would go bankrupt".