Sep 27, 2008

Gaynor On The Bailout

Thanks to No Minister we have just read this very useful analysis the current turmoil in international capital markets by Bryan Gaynor. He gave a similar analysis to Bell Gully clients in Auckland and Wellington earlier in the week.

The US$700 billion bailout is an attempt to save the financial system from imploding, albeit it is now widely recognised that the structure, with the massive amount of toxic securitised debt and derivatives at the top, is structurally unsound.
There was clear evidence of these venomous products in New Zealand this week when Credit Sails, which is a securitised debt instrument sold to the public by Forsyth Barr, announced that it would not pay its quarterly dividend and Standard & Poor's downgraded its rating. Credit Sails' net asset value is only 41c for every $1 subscribed.
The American public is opposed to the bailout because it believes that those responsible for the unsound structure have the most to gain.
A similar situation occurred in New Zealand in the early 1990s when the Bank of New Zealand nearly went under. There was strong public opposition to the Government's purchase of the bank's bad loans because Sir Michael Fay and David Richwhite, who were held responsible for the problems, were perceived to be the main beneficiaries of the Crown's intervention.
But the correct decision was made, the bank was saved and the Government got all of its money back and more.
The only downside to the BNZ bailout was that Fay and Richwhite lived to fight another day and later applied their particular brand of destructive capitalism at Tranz Rail.
The US Government bailout will not solve the finance sector's fundamental problems, namely the excessive use of poor quality securitised debt and high risk derivatives to create credit, but it will give the industry more time to resolve its problems.

Unfortunately we cannot find a copy on line of the graph that accompanies Gaynor's article. That might be just as well. It is frightening.

A kind reader has found a different version of the same graph. many thanks Anon.