No matter where you look today, money are problems. Investors do not want to invest due to risk of volatility and sellers are everywhere. Fear is still spreading on Wall Street and seems like it is not going away any time soon. Just today, major credit ratings agency said it was considering cutting its rating on General Motors Corp. Sell off came after S&P Ratings Services put GM and its finance affiliate GMAC LLC under review to see if its rating should be cut.
Just few weeks back GM received 25 billion bailout from government as GM was headed for bankruptcy. GM posted $15.5 billion net loss and announced plans to cut cost by $10 billion. J.D. Power and Associates and Global Insight lower auto sector expectations for 2008 and predict a slow recovery.
Government has responded again with news of buying stakes in banks. With this Treasury will able to inject capital directly to each bank in exchange for a stake in a bank. Under $700 billion plan Treasury Department would get common or preferred shares from the bank.
With this injection directly to banks would allow banks to loan money and open up and unfreeze their credit lines as well. The rescue plan of $700 billion allows the Treasury to put cash directly into banks, however; there was not much news lately about this. On the other hand this would allow banks to earn interest when banks recover.
Treasury Department is able to negotiate both deals, buy out all bad mortgages as well as inject direct capital into banks. Even if Treasury injects small percentage into US banks, it will most likely have positive effect on the market. But there is no guarantee that even if banks receive injected capital if they will lend again.
If new capital is given to the banks in most cases government guarantees the debt the bank has. So banks can pay-off existing debt-holders. This will not make new loans if banks have too much debt.
Treasury has to make a new stipulation in a plan that all new injected capital will be only used to make new loans, not to allow banks payoff existing debt so small and mid-sized companies can continue operations and keeps economy going by buying products/services, hiring people and most important borrowing capital from banks.
A wave of fear is still in stock market and bad credit market let’s investors sell rather than buy. Even Fed stepped in and lowered its key interest rate to help unfreeze credit markets. With lowered rate cut, this supposed to be a boost to investors; however, market responded opposite way. For homeowners that mean HELOC, ARM loans would be lower. If you receive interest rate reduction on your credit cards make sure you do not carry too big balance, otherwise; your low interest rate may change to higher. Keep your credit limit under 30% of your limit.
In Iceland, government took over all three major banks as it continues to get worse. New emergency powers were enacted to allow government to create a new bank that will take over domestic operations of another one of its collapsed banks. The decision should allow economy in Iceland to return to its normal operations.
Most investors were considering if the plan of injecting capital directly to banks will work, and if so what the effect will have on economy.