This week has been a relatively uneventful week for the economy. Not so much for the markets though- that was more of a roller coaster ride. Over the weekend, Britain and its EU counterparts announced a bailout plan to directly recapitalize banks in exchange for stakes. UBS has already done that with a 6 billion franc injection from the Swiss government in exchange for a 10% stake and the unloading of 60billion in toxic debts. The market responded positively and bounced back up.
On Tuesday the US government followed suit and announced that they were going to spend $250 billion to recapitalize banks, with $125 billion going into 9 major US banks (whether they want/need it or not..or so rumor has it). This directly pumps liquidity into the market and takes effect almost immediately to "unfreeze" the market, and indeed the market seems to be thawing. Banks are lending to each other again at least (also helps with the government acting temporarily as the insurer like the FDIC does for depositors). This will save many businesses who rely on borrowing to operate. So why didn't Paulson and Bernanke come up with this before? I'm sure they did. Probably because back then (has it only been 3 weeks?), with the public being so against the bailout of "Wall Street" such a plan would not have gone by Congress really well....... I suppose now it is ok since Britain and EU have announced it and it proved to be positively recieved. Just like in fashion, where the European runway leads, the New York runway follows.
Of course, this capital injection does not come freely. Not only do banks have to give the government preferred shares, but they will be more heavily regulated and they'll have to limit their bonuses and "golden parachute" compensations. Effectively, banks are becoming part nationalize (and to think Thatcher had to privatize sectors in her days to boost the economy- now we're going the other way and nationalizing everything). JP Morgan has already announced a 30-40% slash in bonuses this year (incidentally their quarterly report just came out and they had a 84% drop in profit- better less than none or negative!). Rumor also has it that GS is dividing their employees into four classes. The top percentile gets cash bonuses, the third percentile get stock compensation, the second percentile gets nothing and the last percentile gets fired! That's harsh! Sounds like it is no longer quite so lucrative to be a banker. While this plan temporary stops the bleeding, it doesn't address the heart of the issue though. The auction plan is still underway.
On Wednesday, the market plunged another 700 pts again on fears of a looming recession (aren't we already in one?). Job losses are up and it is not limited to the finance sector. And it's been predicted that holiday spending increased the least since many years ago this year. On Thursday, oil prices also dropped to $70, the lowest in a year! Hopefully this means more sales and lower commodity prices for us. The DOW finished off over 4% higher for the week though. Maybe more people are heeding Buffet's (who claims that for the first time he'll be buying American equities with his own account) words and snapping up "bargain" classic buys in the market. Smart shoppers.