Wall Street with­er­ing

US$700bn lifeboat cru­cially im­por­tant for SA in­vestors

Finweek English Edition - - Openers - VIC DE KLERK

FOR­GET ABOUT South Africa’s po­lit­i­cal ring-a-ring o’ roses, fo­cus on the US$700bn res­cue deal by the United States to ease its bank­ing cri­sis, which is be­com­ing bogged down in Congress. That’s about the best – if not the only – ad­vice for in­vestors in all types of shares world­wide for the next few weeks.

If the lifeboat isn’t ap­proved, Wall Street and the world’s share mar­kets will blow up. Even if the plan is ap­proved there will be so many strings at­tached that Wall Street – and there­fore all share mar­kets glob­ally – will no longer be the same. Now is clearly not a good time to be in listed shares.

The essence of the US lifeboat – sub­mit­ted to Congress by Trea­sury Sec­re­tary Henry Paul­son and Fed­eral Re­serve chair­man Ben Ber­nanke in a three-page doc­u­ment – is that the US Trea­sury will buy around $700bn of toxic ad­vances from the banks. The Trea­sury will there­fore cre­ate a mar­ket and fix a price for those (poorly named) col­lat­eral debt obli­ga­tions (CDOs).

Note: The Amer­i­cans no longer talk about toxic or weak ad­vances; they now sim­ply call it “rot­ten debt”. The term “bank cri­sis” has mean­while moved on to be­ing a “credit quake”.

The Amer­i­cans no longer

talk about toxic or weak ad­vances; they now sim­ply

call it “rot­ten debt”.

Even Bush re­alises that some­thing se­ri­ous and danger­ous is in the off­ing.

The bail-out plan in­volves the US Trea­sury, which is also stricken with debt, bor­row­ing still more money (or call it cre­at­ing or print­ing, or what­ever) – $700bn of it. That will in­crease its debt bur­den by about $10 000/fam­ily. The Amer­i­can pub­lic isn’t in the least in favour of this and 53% of them in­di­cated in a CNN sur­vey that they’d like to re­ject the plan in its en­tirety (see CNN sur­vey).

McCain showed some sup­port for the plan, which re­duced his chances of victory in Novem­ber’s pres­i­den­tial elec­tion to just 43%. Obama says he’ll sup­port the plan, but with sev­eral amend­ments to the orig­i­nal three pages. That’s im­proved his chances of victory to 52%.

One of the main rea­sons why the Amer­i­can pub­lic is so op­posed to the plan – the cost of which will even­tu­ally be for the tax­payer’s ac­count – is the ex­or­bi­tant com­pen­sa­tion paid in the past to ex­ec­u­tives of Wall Street banks, which are now in se­ri­ous trou­ble. Now tax­pay­ers have to res­cue them.

Just to put the $700bn in bet­ter per­spec­tive: ex­pen­di­ture by the US Trea­sury is cur­rently $2 730bn/year and the fis­cal deficit – the dif­fer­ence be­tween the Trea­sury’s cur­rent ex­penses and in­come – is $172bn. Add $700bn to that and then de­cide for your­self how you’d vote.

I’d also ob­ject if our Gov­ern­ment de­cided to­mor­row to bor­row R100bn (that’s more or less the equiv­a­lent of the US’s $700bn) to save SA’s banks that have granted mortgages to all and sundry without at the same time at least putting a ceil­ing on CEOs’ salaries. R100bn of new State debt would be equal to around R10 000/fam­ily.

Re­mem­ber, SA’s shares are far more ex­posed to the in­ter­na­tional ups and downs than to lo­cal po­lit­i­cal un­cer­tain­ties. Take a look at the ta­ble of our top 11 shares by mar­ket cap­i­tal­i­sa­tion. Put a tick next to each one you feel is largely ex­posed to Trevor Manuel’s res­ig­na­tion/ap­point­ment and lo­cal pol­i­tics. Mark each one ex­posed to the world’s fi­nan­cial credit quake and the pos­si­ble US lifeboat and then de­cide which news events to fol­low: the ap­point­ment of a new pres­i­dent in SA or the cir­cus in the arena of the US Congress?

Ad­vo­cat­ing a lifeboat. Henry Paul­son


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