Nationalization Unthinkable

The US prides itself in being one of the last bastions of free enterprise and unfettered capitalism. Until recently the idea of nationalizing banks would have been unthinkable and would be political suicide for any politician advocating nationalization. The recent mortgage meltdown and the ensuing financial crisis have caused even the Bush administration to consider a partial nationalization of several embattled US banks. The partial nationalization of banks is not expected to affect interbank Forex transactions.

The Unthinkable Becomes Reality

After six straight disastrous days of trading stocks gained slightly after an early report that Treasury Secretary Paulson is considering allowing the Treasury Department to take ownership stakes in several beleaguered banks. The banking and credit crisis has surpassed all other economic considerations and the situation became even more serious Wednesday when despite a coordinated rate cut by US and European central banks global markets still experienced losses. Thursday morning (October 9^th) the New York Times cited unnamed Treasury officials who stated that the recently passed $700 billion dollar bailout bill allows the Treasury to put cash directly into the banking system.

It is hoped that the direct injections of cash will persuade banks to continue lending while strengthening the banks balance sheets. The Treasury would also have the right to take ownership positions in the troubled banks. At present the Treasury’s plan is unclear and without details on how the plan would work. It is expected that the plan would be voluntary for banks. Moves by both the Treasury and the Federal Reserve have strengthened the US dollar on interbank Forex markets.

Paulson Speaks

The Fed has already injected billions into all but frozen credit markets and will buy commercial paper that corporations issue to obtain short term loans and cover day to day expenses. In a statement Secretary Paulson said, “Uncertainty and a lack of confidence have clogged our basic financial plumbing. While our actions have been aimed at restoring financial markets and institutions, our purpose is to prevent financial market difficulties from further impacting businesses and families across the country.”

US Dollar Strong Despite Crisis

The current global financial crisis has made the unthinkable a reality. The fact that a conservative administration such as the present one would consider even partial nationalization of any industry reflects the seriousness of the current global situation. It remains to be seen what effect this partial nationalization of the US banking system will have on the US dollar on interbank Forex markets. The dollar has been holding its own against other world currencies despite the global financial crisis. Latest reports have the dollar rising against the Euro. Despite the dismal US economy the dollar is still seen as a relatively safe haven by Interbank Forex traders.

Financial World Shaken

In a move sure to reverberate throughout the financial world the US House of Representatives failed to pass the US bailout by a vote of 228 to 205. Stock markets reacted quickly and violently with the Dow falling 700 points. Political bickering was blamed for the defeat but several Republican legislators refused to support the bailout plan proposed by the Bush administration. Recent actions by the Fed have somehow made the US dollar the currency of choice for risk adverse investors and interbank Forex markets.

Political Opposition

Democrats said the bill does not do enough to protect average Americans. In an excerpt from Speaker of the House Pelosi’s speech she stated, “Democrats insisted that legislation responding to this crisis must protect the American people and Main Street from the meltdown on Wall Street. The American people did not decide to dangerously weaken our regulatory and oversight policies. They did not make unwise and risky financial deals. They did not jeopardize the economic security of the nation. And they must not pay the cost of this emergency recovery and stabilization bill.” Representative John Culberson, a Republican from Texas, said the measure would leave a huge burden on taxpayers. “This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions.”

Markets React

Credit markets remain frozen and the crisis has spread to Europe. Several banks have been taken over recently and in the UK the government had to bail out mortgage giant Bradford and Bingley. Banks and financial firms in both the US and Europe have essentially ceased loaning money to each other in recent weeks creating a serious credit crisis. Interbank Forex markets also reacted and the future of the US dollar remains uncertain. The crisis stems from mortgage backed securities which saw their value plunge as home prices have gone into their worst slide since the Great Depression. In turn the market for these toxic securities evaporated leaving many banks holding greatly devalued securities which could cause the failure of firms holding these securities.

Financial Sector in Disarray

The failure of the bailout plan follows weeks of sobering news from the US banking sector. Monday morning, the Federal Deposit Insurance Corp. arranged for the sale of the banking assets of Wachovia, the nations fourth largest bank to CitiGroup for 2.2 billion dollars in stock. In other news, the Fed bailed out insurance giant American International Group, loaning it $85 billion in return for a nearly 80% ownership, and Washington Mutual became the biggest bank failure in US history.

Both the White House and Congressional representatives and Senators have indicated that the plan is not dead and that a compromise can be worked out. Markets around the world including Interbank Forex will be watching with intense interest.