September 21st, 2008
11:57 AM GMT
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LONDON, England – The party's over, the hangover is about to set in. Friday's relief at news at the U.S. government's bailout plan which sent stock markets soaring is set to be tempered this week by thoughts of what next?

Yes, Henry Paulson rode to the rescue of the world's banks by announcing that he was set to exorcize them of the toxic debts that were dragging them and us towards financial meltdown. BUT - and it's a big but - the devil will be in the detail.

Is Mr. Paulson going to pay the full write down cost of the bad debt when he takes it off their hands - at enormous cost to the U.S. taxpayer? Or will he play hardball for a discount to the market price - leaving banks to take more pain and reluctant to lend to each other and us? In which case, we're back where we started.

And of course Hank's plan still has to get through Congress. In an election year!

One thing is certain though: The banking industry is in the future likely to be subject to much tighter regulation - and tougher public scrutiny. That will impact growth and profits - and their willingness to lend us money. We're all likely to feel a little poorer in the years to come.

So, over five breathless days we escaped global financial meltdown by the skin of our teeth. With reality set to bite, the coming week is going to be a little less stressful, but no less interesting.



soundoff (23 Responses)
  1. ROLF KLEINLEIN

    The logic would require that other Nations, like Switzerland (UBS) follow the path of socializing bad debt.
    Their governments ought to take over the same structure of bad debt relieve. Paulson made such request. I doubt that will happen. That means that if the plan works for the US banks only then the US banks will be in a much stronger equity position, a competitive advantage for the future. The non-US banks would disproportionally higher charge-offs, i.e. will be much weaker.

    September 21, 2008 at 12:39 pm |
  2. Unni

    The emperor has no clothes on! When we do not understand why workers should help bail out banks it is because there is nothing to understand. We are not stupid. So what, if "everything" collapsed? We would build it up again, but it has to be on solid ground. What is going on now will not provide anything solid.

    September 21, 2008 at 1:03 pm |
  3. Tom Strickland

    Would the AIG bailout save Wall Street and the financial markets? I don't know. I do believe the cost of this bailout will be born mainly by the middle class. Is there another way to save the markets without harm to the middle class? Are there not other companies in similar straights? Isn't it the declining housing market that has lead to the recent bank failures? Will this help eliminate the record number of foreclosures? Is this actually the best way to improve the economy? Could this $85,000,000,000 be better spent?
    What if instead, Congress immediately passed legislation to provide help to people who actually pay the mortgages? Wouldn't this create not just incentive to pay the mortgages, but also increase the ability to make the payment? I would like to see Congress consider an immediate (retroactive to the beginning of this year) bill to make the first $2000 payment per month of a primary residence mortgage 100% deductible for individuals or couples with an income limit for eligibility. This does not affect in any way the other mortgage related deductions, such as interest payment.
    The amount of Adjusted Gross Income and the deduction could be similar to:

    Single Married Monthly mortgage limit
    <35,000 <70,000 $2000
    <40,000 <80,000 $1750
    <45,000 or = 85,000 >Or = $170,000 $0

    However, I am less concerned with the actual income limits than with a move to drive the economy by empowering the middle class. If all these $24000 annual reductions of taxable income are assumed to be in the 25% tax bracket, then this becomes a $6,000 tax saving per individual or couple. For the same number as proposed for AIG – $85,000,000,000 divided by 6000 means this can be used by over 14 million tax payers before it costs more. Considering Fannie, Freddie, the banks and other institutions, this is much less expensive.
    Can't we address the problem? People cannot afford their mortgages, demand for and values of houses are declining. Instead the current proposal addresses the symptom, which is companies who bought mortgage based securities are going broke. Solve the problem and the symptoms disappear. The assets of the companies recover, crisis averted. Due to the level of danger at the moment, a combination of top-down and bottom-up solutions may be required. However, the bottom up stops the continuing decline in the value of the mortgage papers and should drastically slow the forecolosure rate. Once this happens, the value of the assets which will be owned by the Fed will become greater and make the loss to the taxpayer lower.

    Tom Strickland

    September 21, 2008 at 3:31 pm |
  4. Graham S.

    I think we're going to see a restructuring of Banking and Banking practises more in line with a generation ago where the local Banker was a valued advisor.

    One of the keys to stabilizing the economic structure of the US in my view will be a concerted effort to build FTEs (full time equivalents)

    To achieve this shift in paradigm will require a new approach to measuring success on the landscape, such as following quality of life indicators.

    As Banks right themselves with new operating methods, they should be encouraged to invest in regional economic development initiatives.

    After all, they would be one of the biggest benfactors of such a program.

    September 21, 2008 at 3:49 pm |
  5. Mary Cunning

    Why isn't the war – used as a reason for the financial meltdown? During this time was the US – to continue as "normal"?

    Why the "fast" solution – is speed necessary when this meltdown was a slow melt? Wisdom and reflection, cause and effect, with ownership will occur over a period of time and not in the RUSH to solve such a massive proble.

    September 21, 2008 at 3:55 pm |
  6. Jon

    Well, this has been a long time in the making. Some people in the states could not qualify to rent condos, but they sure could buy a house.

    The situation was ridiculous to begin with and a bubble was expected to pop sooner or later.

    An interesting study is of Japan. They had a housing bubble burst too in 1990, and you know what, after tons of government bail outs and short term fixes...their economy is still creeping along at 1.2% GDP growth a year. Sound familiar?

    Read more at http://www.endurancetrading.com

    September 21, 2008 at 4:07 pm |
  7. ALECO -----NOKOMIS,FL

    THE REPUBLICANS AND THE BUSH ADMINISTRATION HAVE CAUSED ALL THE PROBLEMS IN OUR COUNTRY AND THRU OUT THE ENTIRE WORLD.
    NOW THEY PROPOSE TO BAIL THEMSELVES OUT WITH THE TAX PAYERS MONEY.
    DO WE REALLY WANT PEOPLE WITH EXPERIENCE RUNNING OUR GOVERNMENT. THE PEOPLE THAT ARE NOW RUNNINGA THE ENTIRE WORLD ARE PEOPLE WITH A WEALTH OF EXPERIENCE. THEY KNOW ALL THE TRICKS ON HOW TO LIE STEAL AND CHEAT THE HARD WORKING PEOPLE OF OUR COUNTRY.
    I THINK WE NEED SOMEONE WITH SOME NEW YOUNG IDEAS-AND THAT PERSON IS OBAMA.

    September 21, 2008 at 4:08 pm |
  8. sriniva charlus

    The era of making money out of (circular?) trading in derivatives far removed from the real economy seems to be headed for an end –and a good thing too! Comments made last year about these events being one in a billion events are no longer being repeated so perhaps the lesson that one cannot get something out of nothing has been drive home yet once again. To the extent that financial engineers will suffer -it is sad but neccessary. The sooner the US gets back to living within its means the better for the world.

    September 21, 2008 at 4:12 pm |
  9. Karen

    Do I believe in the Trill-Thrill bailout?
    I believe the licensed professionals, real estate investors, lenders, investment bankers, 'the beneficiaries,' and the people who bought or refinanced in the past 5-6 years and should carry the burden. Not all tax payers in general. Not renters or any one who remained sane and financially conservative for the past 5-6 years. The young people just entering the tax brackets should not have to pay for the poor judgment of lending companies who given their 'knowledge' of finance should know better. I believe the investors and lenders did and do know better and are inflating their losses and have found a new way to skim and fleece the tax payers...and God forbid get away like skilled bank robbers. I worked in the secondary mortgage market for the past 6 years. I reviewed thousands of sub-prime loans and wondered along with many others reviewing loans how the homeowner was going to afford to make the payments and eat. Many sub-prime borrowers were allowed and encouraged by 'licensed professionals' to state their income and assets placing the collateral burden solely on the inflated value of the home. Many borrowers were 'qualified' using the introductory teaser rate and at as much as 65% debt to income. If the borrower managed to afford the payment after the teaser rate adjusted there was still another adjustment just a few months away. It's hard to believe lenders and investors are so out of touch with reality that they think everyone takes home a $30-40 million a year paycheck. They're the ones who need to put the money back were it belongs and quit stealing. It's hard to believe the people 'running' the lending companies are that financially inept. Inadvertence and mistake are not excuses in this case.
    Signed,
    Pity

    September 21, 2008 at 6:04 pm |
  10. Rich Bowler

    The cycle of greed is being fed by the bailout!!! Like a parent enabling an irresponsible teenager, the government is letting all of the "experts" off the hook at the expense of future generations...once again.

    We have been living above our means for too long as a country. The only thing that saved us in the 90s was the international entities that have been only to happy to finance our largesse.

    People who took out these 'sub-prime' loans – after being approved by the supposed "adults" in the business transaction – have lost homes, filed for bankruptcy and learned a painful lesson. The entities that should have known better than to grant those loans are now getting bailed out to the tune of about $1,000,000,000,000. That is a trillion in case you don't appreciate the magnitude.

    These investment entities didn't just miss their fiduciary responsibilities by a little, they missed it by a lot! (see big number above). We shouldn't be bailing them out, we should be making them post bail!

    If you every went to business school or just read an article on business topics, then you are informed enough to know that with high rewards come HIGH RISKS. We cannot circumvent this fact. If we bail these entities out then all we are doing is mortgaging our children's future. They have taken in large salaries and great profits for the past decade...now, they should feel the pain of feeling invincible and exceeding even the far reaches of common sense.

    If this trend continues, the race is on to see what comes first...the ultimate bankruptcy of the entire US government or the demise of our planet due to warming. We once viewed these things as generational marathons....we are now in a 1500 meter race. If we are not careful, each of these will turn into a sprint to the finish.

    When generations past made mistakes, they never had to look the next generation in the eye when the bills came due. If we continue down this path of bailouts and federally funded safety nets, the GEN X'ers will find that "X" marks the spot. That spot where we'll still be alive and need to look our children and grandchildren in the eye when they realize we screwed them over because we never took responsibility for our actions – and the actions of our parents. With the advances in modern medicine in the treatment of diseases like Alzeimers – that look will come with complete clarity for everyone involved.

    I don't have the answers, but I sure as heck know when we are starting down a slippery slope and will have no one to blame but ourselves when the most important debt of all comes due!!! And no government can bail us out at that point.

    September 21, 2008 at 8:47 pm |
  11. Linda L

    If we are paying China 11% or more in interest on loans made to keep the government afloat, why is interest on US bonds so pitiful? Savings bonds used to be a good deal. I would reconsider investing if I were paid even 6-9 %. A much better deal for the country.

    September 21, 2008 at 10:27 pm |
  12. Katherine

    What are the banks giving up for this bail out. How about milions of dollars in pay cuts. The salaries and stock options the heads of these institutions is a joke. Look at what the head of Countrywide walked away with. How come no one is going after that money.

    September 21, 2008 at 10:28 pm |
  13. William Benefield

    * The fallout from the financial meltdown will only benefit mainly one group of people. THE CEO's and the rich will continue to make millions of dollars from their failed policy directions. If the government is truly an advocate for all class of individuals, here is a policy that would help especially the middle and lower class. I believe that CEO's have taken advantage of stockholders and employees and the lax regulatory oversight. If the government take a position as being a champion for the average American, then that would go a long way to give this bailout credibility.
    At the present time, the Average person has a more negative view of CEO's than our Congressional leaders. I believe that the ALL stock holders should take the position that CEO's should only be allowed to make NO MORE than 100 times the lowest wage earners in their company, then I believe it would be to the CEO's benefit that the lowest paid wage earner would see an increase in their wages. The CEO's of America would want to see the lowest paid workers of their company earning more, hence, the trickle down effect. The financial policy of the government should be a policy that helps the average stockholder and middle and lower paid workers, NOT the CEO's. Only in this way will the mortgage mess be corrected.

    September 22, 2008 at 12:52 am |
  14. gatkin09

    Yes the banking industry will be subject to tighter regulation...for a while. We have been here before or have people forgotten the Savings and Loan Crisis in the late 1980's?

    The worlds markets will work through the current crisis, another bull market will arrive and within a decade we will have yet another market meltdown, it just seems to be the pattern that keeps repeating.

    Greg Atkinson
    http://www.shareswatch.com.au/blog/

    September 22, 2008 at 1:39 am |
  15. Vera Ellen Rich

    RE: PROPOSED BAIL OUT OF FINANCIAL MARKETS

    Dear Sir/Madam:

    FIVE WORDS: BEWARE! NOVEMBER ELECTIONS ARE COMING!

    This email is in response to the Administration’s proposed bail out of financial markets. I am BEYOND outraged that this is even being considered! Did no one ever learn the meaning of the term “capitalism”— that the risk of investing MUST require the possibility of loss so that the markets can correct themselves? The market is trying to correct itself if we will just leave it alone!

    So what happens when the next problem happens and you have set such an awful precedent? Financiers will presume that you will bail them out again AND YET AGAIN continue to produce more and more greed if they are not stopped NOW!

    How much more debt do we honestly believe we can take to our grand children? How much of our country’s wealth do you want to sell to China in debt instruments? We are having trouble meeting our country’s needs due to the debt service we already have!

    It is bad enough that we have failed miserably to control our national debt in the multiple trillions that we might willingly add another trillion to it! Further more, for Democratic Presidential Nominee Barack Obama to propose ANOTHER stimulus payment as a precondition to such a bail out is also too ridiculous for words. We had to print more money and assume more debt to do it the stimulus payments the first time– and it did NOT work, just created MORE debt and delayed the markets uptimate correction! How insane is his picture???

    Wake up and smell the coffee up there in Washington! It is past time for politicians to get OUT of the way of financial markets, let the people who created the risk–fail– and then the country will move on. Yes, it is rough but that is life. There is life on the other side and the sky is not falling! Of course the Stock Exchange is going nuts—they think they have all won the lottery– with taxpayer’s money!

    More and bigger government is NOT the answer here and I will do everything in my power to personally campaign against ANY elected representative who approves this mess. Remember, you are there to SERVE the people, not financiers who should understand risk.

    As Ms. Susan Powter used to say, “STOP THE INSANITY!”

    Most Sincerely,

    Vera Ellen Rich, CPA
    Chiefland, FL

    September 22, 2008 at 1:58 am |
  16. John

    Sometimes you just need to have faith in the global economy. The U.S. taxpayers will foot the bill eventually. Why not sooner than later?

    September 22, 2008 at 2:29 am |
  17. Ralph Peoria, Il

    There are millions of people in the United States who make their living trying to separate people and their money. Stockbrokers and lawyers are probably the two biggest groups.

    They sleep very well knowing they made the big score. They are above the law because they have most of our Congress in their pockets.

    If you are going to place blame ,then I guess to get to the root of this economic meltdown, then you must look at Congress and the White House.

    Both parties look like Trick or Treaters at your door with their hands out., except instead of being cute little kids they are a bunch of "Old Creepy Guys"

    They extend their hands to all the special interests for "Services Rendered" and the GOP is probably the worst.

    If we had laws that worked for everyone, we would probably need 98 new Senators and 430 new Representatives after we locked up the ones we have in power now.

    The numbers allow for maybe 7 honest people in Government.
    Although that estimate may be high.

    "White Collar Crime perpetrated by White Collar Scum"

    September 22, 2008 at 3:09 am |
  18. Charlie

    Another Bush, another bailout. Does anyone rememmber the Savings and Loan bailout? Does the name Neal Bush ring a bell?

    September 22, 2008 at 3:14 pm |
  19. John Nicholas

    With the disappearance of 'easy' debt now being reinforced by increasing regulation through more onerous rules, are we going to see a return to the higher marginal propensity to save of decades past? If increased regulation is reinforced by long-term legislation to curb more risky consumer debt, such a restructuring of economies seems inevitable.

    What are the implications of a world economy that consumes less of household income and saves more? And how might this affect the world's dependence on the growth expectations of the BRIC economies?

    September 22, 2008 at 5:11 pm |
  20. Tess F

    Send every last one of these banksters to jail! Better yet, make them all wear a sandwich sign and walk up and down the street with it saying, "I AM THE ONE THAT DESTROYED YOUR LIFE" and see how long they live. Will this happen? Are you crazy America? This is what the hard working people do. We let those with college educations get the big jobs and play at destroying them. When they're done wreaking their havoc, they get bailed out by the hard working people.
    Just remember, when you can't feed your kids properly, know that all of these jerks in power are feeding their kids with good nutritional foods and having someone else prepare the meals as they are too busy destroying US the people.
    Time to take names and call your Senator who took an OATH to protect the people. Senator Salazar is not doing his job. Is your Senator? Very doubtful.

    September 22, 2008 at 6:22 pm |
  21. John

    It is disturbing to hear of Mr. Paulson's fascist style takeover of markets. Does anybody truly believe that markets can be "managed?" Really, how well did the Soviet Union manage its economy. Keynes was a fool. The market needs to correct itself, and more government tinkering/regulation/whatever is only going to make things worse. The bankrupt need to liquidate their assets that are not of value at the market borne price. Clear them and move on. The pain will be harsh and shorter lived than if the government continues with this folly.

    I am wholly offended that Mr. Paulson wants to take our tax money and bail out his fat cat friends on Wall Street because of their idiotic lending practices. Furthermore, we must do this now, or else...What a bunch of crap!! This bloodthirsty power grab is one more example of a Bush administration run by crooks. One thing is for sure, the meltdown is NOT from Free Market issues, we haven't had free markets in the US in decades.

    The best way to fix this mess is to immediately halt all nonessential government spending, eliminate the capital gains tax completely, and stop fiddling in the market place. Let things settle themselves out.

    September 22, 2008 at 9:16 pm |
  22. Angela Blondeau

    Adrian, We like the new format on Business International, however, my husband & I keep wondering what happened to Todd Benjamin?

    We thought the rapport between you both when digesting the financial mess was brilliant.

    I know some people called Todd, Mr. Doom and Gloom, but look at the meltdown now! He was right. Ït's not over", he kept telling you, and us viewers.

    Has he moved on, or will you and he return with more great stuff for thought.

    We truly like your style, so don't disappear

    PS We miss your rapport with Jenny Harrison. She's great too.

    September 24, 2008 at 2:55 pm |

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