10 February, 2009

Reaction to New Financial Bailout Plan and Stimulus Bill Passing bearish

Markets traded in negative waters in early morning trade, but it wasn't until details of Tim Geithner's plan for the remains of the Financial Bailout the things scampered quickly into the bear caves.  The Dow Jones finished lower by nearly 400 points (4.6%) and the S&P and Nasdaq followed with declines of 4.9% and 4.2%, respectively.

The Financial Bailout Plan, the new one of course, since the first $300Billion seems to have been vastly misplaced and mostly wasted, is one riddled with rules and regulations sure to make most on Wall Street unhappy with the prying eyes of Washington.  But maybe that's the point, because just maybe that's what is needed to restore both public and the private sector confidence.

Bank Bailout details have been written about in several news outlets today, including CNN (Link) but the overwhelming theme is better and deeper scrutiny.  In an economy where the public has little to no confidence in the health of their banking system it may be a necessary evil. Banks will undergo tests to determine how capitalized they are before, during and after they receive funds, and the Treasury will take positions in preferred shares of companies receiving these funds.

Certain conditions will have to be met by institutions receiving money, such as the provisions included to make sure Banks work with homeowners on the verge of foreclosure in an effort to keep people in homes by redrafting payment terms and a partnership with the private sector to purchase and cleanse bad assets from the books of infected financial institutions.

Luxury items are a big public sentiment play for the President and his administration.  Clearly the public doesn't want to hear headlines about executives making multi-million bonuses while banks cry for hand-me-down money.  So executive compensation and corporate luxury spending will be scrutinized and have to go through an approval process.

The whole point here it go get banks comfortable to lend again to individuals, small businesses and large corporations, with secondary objectives of keeping people in their homes if possible and restoring public outcry over excessive compensation packages.

Oh and of course the plan will likely cost far more than initially anticipated, with numbers being thrown around of near $1Trillion in provisions, but as President Barack Obama iterated in his press conference yesterday, the cost of doing nothing is that much graver.  Oh and this on the heels of the Senate approving an $830Billion Stimulus bill that will attempt to stem the rate of job losses and put men and women across America back to work on Infrastructure, Energy, Health Care and Technology projects.

The President of the United States has indeed inherited quite an economic mess and only time will tell if opening up the ever-deepening Federal Wallet will be the inflection point the country, and the world for that matter, needs to spark itself out of Recession.

The Markets have had their say today, and so far the sentiment is pessimistic.

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