Information Technology Risk Management

The Rescue Plan: Bringing Confidence Back to the Credit Markets

It's Tuesday, and there's more good news (I think it's good news) - the Treasury department announced earlier today that it will buy preferred stock in nine of the nation's largest banks. Bank of America, Citi, Well Fargo, JP Morgan Chase, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street and Merrill Lynch will all receive an infusion of capital anywhere from $2 billion to $25 billion. The government investment in regional financial institutions is expected to follow next.

Lesson learned for this week - well, actually there are two. First lesson: Credit is a function of one's confidence in the borrower's ability to pay back within an agreed-upon timeframe. The recent turn of events has shown us that at times this "confidence" could be somewhat removed from the facts. In a statement this week, Treasury Secretary Henry Paulson mentioned "Today, there is a lack of confidence in our financial system - a lack of confidence that must be conquered because it poses an enormous threat to our economy. Investors are unwilling to lend to banks, and healthy banks are unwilling to lend to each other and to consumers and businesses." As part of this statement, Paulson stressed that some of the banks among the nine institutions accepting the government's offer to buy preferred shares are healthy. This investment in their capital will enable these institutions to increase their lending. Hopefully, this will bring the confidence back in our financial system and "un-freeze" the credit markets.

It's time to make some tough decisions, at times against one's preferences. 

The second lesson: We live in a connected world. Not just the Wall Street and the Main Street. Not just the Investment Bankers and the Retail Bankers. Not just the U.S. markets and the European and the Asian Markets. Not just the credit to mega-corporation for expanding their operations and the credit to a student for paying their school tuition.

It's not easy - in fact, in my opinion, it's impossible -- to decouple these institutions. We are in this together. It's time to make some tough decisions, at times against one's preferences. As part of the statement from the Treasury department announcing direct investment in the nine institutions mentioned above, I heard Secretary Paulson saying "Government owning a stake in any private U.S. company is objectionable to most Americans - me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."

Back to the direct investment discussion for a moment. Because the source of this funding are the taxpayers of the U.S., I suppose it's only fair to say that I own a piece of these banks. Some would disagree with this statement, but it kind of felt better saying "I own a piece of these banks" after seeing my 3rd quarter 401-K statement last evening. Hopefully, this investment will have better returns than the ones I made on my own.

Stay tuned. It's only Tuesday. There are three more days to go in this week.

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