Resurrecting the Resolution Trust Corp: Will it Help?

By Kathy Lien, An SA Author.


Over the past few days, the markets have shrugged off the government’s bailout of AIG (AIG) and a flush of liquidity from central banks around the world. No matter what the Federal Reserve or the US Treasury tried to do, they failed to please the markets. However in the last few hours of trading Thursday, a possible resurrection of the Resolution Trust Corp [RTC] sent the stock market surging and gold prices plunging. New traders may wonder what the RTC is and how it can help the markets.

The RTC is essentially a government owned asset management company that is tasked with taking over and eventually liquidating faulty assets. It was first created as a result of the Savings and Loans crisis of the 1980s. For the readers of the Wall Street Journal, former Fed Governor Paul Volcker, former US Treasury Secretary Brady and former US Comptroller Ludwig wrote an opinion piece on Wednesday calling for the current Administration to resurrect the RTC.

The idea was then floated around by current US Treasury Secretary Paulson Thursday afternoon, triggering the sharp reversal across the financial markets. USD/JPY traded as low as 104.00 just a few hours before talk of the RTC hit the newswires and afterwards, it rallied up to 105.78. However the more important question to ask is whether or not an RTC will help. The problem in the financial markets right now is not with lending but with letting money go. No one is willing to take on risk, but if the RTC is willing to do so and keep it in house for months or even years before liquidating so as not to flood the markets with bad assets, it can help. According to the opinion letter in the WSJ, if the RTC buys the bad debts, it accomplishes the following:

1. Restores Liquidity
2. Orderly Liquidation of Troubled Paper
3. Reduces Foreclosures because the Agency Would Manage Mortgage
4. Can Help to Revive Banks Stuck with Troubled Paper

Is the US at Risk of Losing its AAA Rating?

However the big danger of inundating the US government with bad debt at a time when they have spent a tremendous amount of public funds to bailout companies like AIG is the risk of the US losing its AAA credit rating. On Wednesday, S&P said that “there’s no God-given gift of a AAA rating, and the US has to earn it like everyone else.” Although the S&P followed that statement up by saying that they are not at risk of losing their rating, we certainly believe that with the US, they will be more reactive than proactive of downgrading the government’s debt if needed. The consequences would be catastrophic if the US gets downgraded, but Americans cannot have their cake and eat it too. Not only will US tax payers have to pay for this eventually, but 15 years down the line, Medicare obligations will balloon and if the US government doesn’t get its balance sheet into shape by then, the consequences could be even more severe.

Fire up the Printing Presses?

This is perhaps the reason why the Federal Reserve may consider firing up the printing presses. Along with major central banks from around the world, the Fed has added $247B in a coordinated liquidity injection this morning. To pay for this, they are selling an additional $100B in short term debt, which in essence sterilizes their efforts. If that doesn’t work in stabilizing liquidity, the Federal Reserve can always print money. Printing money has its problems as well, since accelerates inflationary pressures and with inflation just beginning to trickle lower, the Fed may not want to take this gamble yet.

Related Posts :

The Fed is Considering Creation Of A Repository For Banks' Bad Debt

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Soros sounds alarm on oil and commodities 'bubble'

From HotNewsTurkey.com on September 18 :

Billionaire investor George Soros is expected to tell United States lawmakers on Tuesday that “a bubble in the making” was under way in oil and other commodities and that commodity indices were not a legitimate asset class for institutional investors.

According to the report by the Financial Times, Soros is expected to tell a congressional committee that rising oil prices are the result of a number of fundamental changes and factors in the market, but that the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises and creating an oil market bubble.

He is expected to tell, “I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987,” to the Senate commerce committee Soros, according to a draft text seen by the FT.

“In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash.” Soros was quoted as saying.

Soros’s comments are seen likely to fuel a debate about the role of speculators in the increasing costs of energy and food. While, Soros Fund Management, a $17bn hedge fund declined to comment on its specific market positions.

Fundamental supply and demand factors combined with a depreciating dollar, which is used to price and trade commodities, are mostly seen as the main reasons for the surge in oil and commodity prices, by regulators and other officials.

However, some politicians believe that the new wall of money entering the asset class through commodity indices is a key factor. Tuesday’s Senate hearing into energy market manipulation and federal enforcement regimes is one of a series of held in Washington in recent months examining aspects of the market.

Soros said index-buying was based on a misconception and commodity indices are not a legitimate asset class. “When the idea was first promoted, there was a rationale for it ... But the field got crowded and that profit opportunity disappeared,” Soros said in his prepared remarks quoted by the Financial Times.

“Nevertheless, the asset class continues to attract additional investment just because it has turned out to be more profitable than other asset classes. It is a classic case of a misconception that is liable to be self-reinforcing in both directions.”

Related Posts :

1. Soros: "Financial bubble" of the last 25 years coming to an end
2. George Soros and Our "Superbubble"

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

Soros: "Financial bubble" of the last 25 years coming to an end

From Mercopress, The South Atlantic News Agency :

Billionaire investor George Soros has given his gloomiest assessment of the state of the US and world economies. Speaking with BBC business editor Robert Peston Soros said that the "acute phase" of the credit crunch may be over but effects on the real economy are yet to be felt.

He warned the "financial bubble" of the last 25 years could be drawing to an end and the post World War II "super-boom" era could also be over.

He predicted a "more severe and longer" US slowdown than most people expect.

And he said that the UK was worse-placed than America to weather the coming economic storm, because it had such a large financial sector and has had the biggest increase in house prices.

Mr Soros said that the current mandate of most of the world's leading central banks - where their main focus was fighting inflation - meant there was limited scope for cutting interest rates to help economies recover.

As for the Bank of the England, he said, "it was like a Greek tragedy", because they "couldn't do a U-turn" until there was a full-blown recession, which would finally take away the price pressures.

It was "inevitable" that they would keep rates too high for the good of the economy, he added. In part, Mr Soros is echoing the gloomy forecast of the world's central bankers in recent weeks.

The head of the European Central Bank, Jean-Claude Trichet, recently told the BBC that the "market correction was still on-going".

Mervyn King, the governor of the Bank of England, warned in the Bank's inflation report that UK inflation would rise above its target while the economy would slow sharply.

Mr Soros believes that central bankers are partly to blame for the credit crunch because of their past behavior in bailing out the financial sector whenever it got into trouble for over-lending, the so-called moral hazard problem.

He said that the central banks should explicitly target asset bubbles such as housing booms and try to stop them getting out of control, which is something they have resisted doing so far.

And he said that tougher but smarter regulation would be needed in the future in order to reduce the excess supply of credit in the economy.

These could include measures to force banks to put aside more reserves in good times to help cushion them in bad times.

Mr Soros believes that oil and other commodities are over-priced, but he sees little chance of the price of oil coming down until there is a big slowdown in the richer economies. He sees the price of oil as being driven by higher demand in developing countries such as China, where subsidized energy costs mean there is less price-sensitivity.

He also said that stock markets are still underestimating the severity and length of the economic downturn, especially in the US, and are now having a "bear market rally".

Mr Soros has credibility partly because he is prepared to invest his own money to back up his convictions.

The private investment fund he has resumed managing made a return of 34% last year betting that the credit crunch was more severe than many people expected.

Mr Soros was the man reported to have made a billion pounds in September 1992, betting correctly that the British currency would have to be devalued and leave the European Exchange Rate Mechanism.

Mr Soros has devoted much of time since then to philanthropy, especially in Eastern Europe.

Related Posts :

George Soros and Our "Superbubble"

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

The Fed is Considering Creation Of A Repository For Banks' Bad Debt

Today, September 18, The Dow ups 459 points ahead of the bell after a report that the federal government is considering creation of a repository for banks' bad debt. The positive sentiment of the market was also driven by $180 bn injection from the Fed and other central banks into financial system.

According to CNBC, Treasury Secretary Henry Paulson is considering creation of an entity like the Resolution Trust Corp. that was formed after the failure of savings and loan banks in the 1980s.

Related Posts :

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.