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Can "They" Save the World?


In the battle for who gets bailed out, which companies and countries make the cut?

The names are different, but the issues are the same. Replace Bear Stearns with Iceland. Or Countrywide with Hungary. Or even Lehman Brothers with Ukraine.

What started as a US sub-prime mortgage crisis now appears to have morphed into a global political and financial crisis. While the specific issues of capital adequacy have been replaced with foreign currency reserves, the fundamental themes are the same.

Yesterday the Federal Reserve expanded its dollar swap lines from 10 countries to 14, bringing on board the central banks of Mexico, Brazil, South Korea and Singapore. In addition, the IMF created a new $100 billion fund to be available "with no strings attached" to countries that, according to the Wall Street Journal, "the IMF judges to have basically sound economic policies to shore up cash reserves, their currency, and their ability to help ailing companies as shaken foreign investors withdraw."

Call me suspicious, but giving swap lines to Mexico , Brazil, South Korea and Singapore has a similar feel to extending the TARP to Regions, Keycorp and Suntrust. And comments about "sound economic policies" coming from the IMF eerily remind me of comments from our own regulators about the "sound balance sheets" of Fannie Mae (FNM), Freddie Mac (FRE) and several other now deceased financial services firms.

Rather than seeing a reduction of global financial risk by the entrance of new market participants, risk is being increasingly concentrated into the hands of the world's largest central banks and the IMF. Apparently, together "they" can save the world.

In theory, what "they" are doing with their increasing number of acronym-named global bailout programs ought to provide comfort to investors. But, I worry that the haphazard and often blatantly nationalistic nature of the global regulatory response will prove ultimately unhelpful.

I would offer that the inconsistencies that we saw among rescuing the banks (Bear Stearns is saved but Lehman is not) appears to be playing out with countries (Iceland fails while Hungary is saved.)

Don't get me wrong, I would like "them" to succeed; but, I would offer that from an economic perspective we're at the beginning of the cycle decline, not the middle and certainly not the end.

The fundamental problem has been, and continues to be, capital inadequacy, and nothing that I've seen from regulators in the US or abroad has been aimed at that problem. (For example, notwithstanding "umbrella coverage" from the US Treasury, both Freddie Mac and Fannie Mae now have a negative tangible net worth.)

As the problems mount globally, the choices for our political leaders become more tenuous. How do "they" save California and Pakistan? General Motors (GM) and Korea? The line for those awaiting the lifeboat grows daily. Whether everyone fits remains to be seen.
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