Wall Street withering
US$700bn lifeboat crucially important for SA investors
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