Thursday night, September 25, 2008 9:40 p.m.
Federal regulators have seized the fourth largest bank in America , the multi billion dollar thrift Washington Mutual based in Seattle. To prevent its bankruptcy, they have arranged for many of its assets to be acquired by J.P. Morgan Chase thereby avoiding the Federal Deposit Insurance corporation from being forced to bail out depositers.So another major banking institution has fallen victim to the sub prime real estate derivatives credit crisis.
This should put additional pressure on members of the House and the Senate to come to a compromise agreement so as to begin the process of unblocking the financial markets. Partisan politics and value differences over the appropriate role of the public sector appear to have for the time being derailed the talks in Washington.Some Republican members have been urging an alternative proposal which would see special new government sponsored insurance to resuscitate the derivatives market and have a consortium of private firms buy up some of the debt.The problem with this proposal is that the Government would still be on the hook through its insurance provisions but be denied the opportunity to ensure that it obtained some quality assets to yield future earnings for taxpayers.
It is quite likely that a hybrid proposal would leave the inferior more distressed assets to the public sector thereby increasing the risk of loss in the future. Still a combination of approaches might work provided there was careful enough oversight and a fair carefully considered division of the assets.But it is rather unlikely that such a group of domestic or even foreign investors could be found that easily or that the distressed firms would be keen to pay the full market values of the insurance premiums.
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