Bad-debt Bank In Pipeline Us Plan To Control Mortgages

The Age

Saturday September 20, 2008

By Vanessa O'Shaughnessy and Eric Johnston

AN AUDACIOUS plan to eliminate banks' bad debts has spurred a sudden recovery on world markets, providing a much-needed confidence boost for banks, which led the Australian sharemarket 4.3% higher.

Prospects are for further big gains on Monday, given soaring markets last night in the US and Europe.

US Treasury officials are examining a structure that would acquire stressed mortgages, similar to the Resolution Trust Corporation created during the US banking crisis of the 1980s and 1990s.

This spurred a record 38% surge in Macquarie Group's shares to $35.90, dousing concerns about its viability as a stand-alone investment bank. The jump recouped its white-knuckle plunge on Thursday as the stock was savaged by investors, including short-sellers, as fears about its ability to access credit markets spread.

Late yesterday, the Australian Securities and Investments Commission and the ASX joined US and British regulators in tightening the rules on short-selling, to protect market value and alleviate market volatility.

In the US and Britain, traders have been banned from short-selling financial stocks, and Australian brokers will have to comply with tougher reporting guidelines if they intend to profit when a stock declines.

"The real circuit-breaker has to be the co-ordinated policy action and the feeling that some floor is being put under markets," said Schroder Investment Management's head of Australian fixed income and multi-asset, Simon Doyle.

Around the world, banks, investment banks and financial services companies have been battered, whether they had access to debt funding or not.

"Six months ago, it was viewed as being a US crisis that had affected a couple of lenders in the UK," Mr Doyle said. "The issue here is that it's a global crisis."

But the announcement of a "bad-debt bank" that would assume responsibility for lenders' problem assets was met with universal market approval.

The S&P/ASX 200 Index was catapulted 196.8 points higher, to 4804.1 points, recording its best day in eight months. Hong Kong's Hang Seng jumped more than 9% and Japan's Nikkei gained 3.8%.

The burst of optimism carried through to European markets. London's FTSE was the best performer, up 8.8% as this edition went to press.

In the US, the Dow Jones Industrial Average was up 317 points, or 2.9%, in early trade on top of a 3.9% gain in the previous session - its biggest one-day gain in six years.

"This could be the big one that stops the rot," said Colonial First State's head of investment markets research, Hans Kunnen.

US Treasury Secretary Henry Paulson stressed any rescue package needed Congressional approval. But he said legislators would act quickly.

"We're coming together to work for an expeditious solution which is aimed right at the heart of this problem, which is illiquid assets on financial institutions' balance sheets," he said.

Mr Kunnen said efforts to facilitate a deal between JPMorgan and investment bank Bear Stearns as well as supplying $US85 billion to prop up insurance company AIG and bailing out mortgage finance companies Freddie Mac and Fannie Mae had been too piecemeal to console the market - at least for very long.

But the Resolution Trust Corporation, which was created in the late 1980s, had set a precedent in helping to resolve a serious financial crisis. It took control of mortgages held by about 750 insolvent US banks, and sold off their assets over time to avoid a fire sale.

The proposal to set up a similar body has reversed the fortunes of banking stocks worldwide.

© 2008 The Age

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