The US corporate finance sector has undergone thick turmoil in the last one decade. To an extent, the current chaos should have been seen coming, from afar. With consecutive catastrophic losses, rising and overpowering unemployment, and little government control in how institutions bear risk, it just had to happen. Bad stuff has happened, jobs have been lost, careers thwarted, and portfolios shredded. Yet the worst has not happened and still can.
Realizing this, the US government has seen the need to bailout some of the key financial institutions and help them regain a footing in the cutthroat market. The economy is very sore now, having watched the crisis unfold and then begin to bite. As such, the US Treasury bailout plan has a multifaceted role of rescuing banks, protecting their consumers, and restoring the confidence of investors in the market. These three roles must be met and played by the government if the economy is to pick momentum soon and wipe itself of the shame of the mortgage crash.
In February this year, US Treasury Secretary Timothy Geithner announced the administration’s set of measures that could help in restoring the confidence of both investors and consumers in the banking sector. Simultaneously, he expressed the need to curb and limit the executive pay kits awarded by the bailed out financial institutions so as to prevent a repeat of the AIG mess. Geithner’s Financial Stability Plan has the overall mandate of assuring US taxpayers that each dollar that is drained into the Treasury bailout plan is only used to uptune lending and revitalization of the economy. Backed by Obama to the core, the US Treasury plan seeks to imbibe a new era of absolute accountability and transparency in this financial institutions benefiting from the bailout kitty.
In his words, “The government believes the bailout access to public coffers is not a right but a privilege. So when the government provides the needed support to banks, the aim is not to benefit the banks, but the businesses and families that depend on these banks,…and to benefit the country at large. The support must therefore be given with strict conditions intent on protecting the American taxpayer.”
The key aspect of the US Treasury plan is the effort to gradually strengthen American financial institutions until they are able to support complete recovery. The idea is to keep the banks lending out to the market because in the absence of loans and mortgages the economy will dive into a downturn very soon. As such, the banks that will qualify for the Treasury bailout funds must keep lending and providing mortgage arrangements to customers. Additionally, and to prove that they are using the funds well, each firm and or institution must deliver a detailed monthly report to the US Treasury Department.
This report should detail the institution’s lending trends, broken down by category, and clearly indicating how many new loans have been processed and awarded to both businesses and consumers, and then how many mortgaged securities and assets they have purchased. This quantification of lending progress must then be pitted against a fiscal description of what the lending environment of the institutions’ communities or market segment is. The US Treasury bailout plan has specific interests in recreating and preserving the lending and financial stability of the financial sector not only by giving stimulus cash but also by putting strict limits and checks on the permeating bonus-culture that has actually caused the whole crisis.
In this, the US Treasury plan will limit common dividends, acquisitions and stock repurchases so as to provide assurance to the investors that their portfolios are safe in the financial sector. Banks will thus be restricted and barred from repurchasing privately-held shares without approval from the Treasury Department and or their primary regulator.
[ad#downcont]Having already committed themselves to flood the American financial industry with $2.5 trillion, the US Treasury plan failed to impress market players mainly because on being scanty on details. A considerable fraction of this $2.5 trillion US Treasury Bailout plan fund, an approximate $350 billion will come from a Treasury bailout fund while the rest will be sourced from private investors. The Federal Reserve will also implement its statutory mandate of printing some more money. Government rescue should at all times be a last resort, and when it is given, it should be very detailed on its contribution and implementation. That is where the US Treasury plan falls short. The initial assessments from the financial markets, lobbyists, lawmakers and key economists have been brutally negative towards the bailout plan.