Margareta Pagano: Wall Street must wait for the Messiah to speak

Markets look for a miracle from Obama's government

Sunday 22 February 2009 01:00 GMT
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If President Obama was seen as the world’s messiah, it has fallen to Timothy Geithner to be his messenger on earth. After Friday’s hysteria in the financial markets, the pressure is piling on the new US Treasury Secretary to pull off the miracle that his heavenly master has yet to achieve.

Despite the most sincere assurances from the White House on Friday that the banking industry is sound, the shares of the big US banks plunged in the most febrile and emotional trading as investors deserted bank stocks. All they could talk about in New York was about whether Citigroup and Bank of America – whose shares plunged to new lows – would ultimately end up being nationalised. Denials from both banks did absolutely nothing to restore the confidence that had been collapsing again all week, forcing New York stock market prices down to its lowest levels since last November.

The rout was sparked by the big institutional investors who claim they don’t know enough about the administration’s plan to prop up the banks and want more detail if they are to continue investing in the banks. They are worried that Washington is running out of both time and options. Understandably, investors are terrified that if the government goes ahead and nationalises the banks, they will be left with nothing.

That’s why all eyes will be on Geithner this week as he is due to spell out the details of the banks’ rescue plan in another attempt to draw a line under the crisis. He’s already spelled out that there is capital available if needed, and that it can be provided as private capital rather than public money. Another important bit of the jigsaw which Geithner will unveil is a new “stress test” for the US banks that the regulators hope will provide investors with assurances on the financial fitness of the banks. If presented properly, this should help restore some confidence. But, as always, the devil will be in the detail.

What Geithner says is just as important for us in the UK as our markets are linked to each other more than ever. In fact the mood here in the UK mirrored that of the US in the most extraordinary fashion last week. Just about everyone I spoke to, whether banker or industrialist, seems to have become resigned to the idea that full nationalisation of RBS – and possibly Lloyds – is the only way that trust will come back into the system. Many see it as the only way that the banks are going to starting to lend to each other again. If the politicians really can’t bear to take the nationalisation route, then it may be time to revisit a “bad” bank into which all the toxic debt is placed. As all the other initiatives are failing, this could be the one that ungums the system.

One of the first people to suggest a clearing house for bad debts – pretty much the same as a bad bank – was the legendary investor, George Soros. The maverick investor was his usual controversial self at the weekend, warning that financial capitalism, as we have known it, is over for decades. Soros is right. Creating the boom took years to achieve and it will take years, if not decades, to unwind. It’s why investors around the world should calm down and wait for Geithner’s plans.

Giving him the role of miracle-maker is too heavy a burden even for this bright young man. Give him a break.

Now is a good time to invest as old-fashioned capitalism is alive and kicking

Stock markets around the world are tanking but they are at least working as they should. UK’s biggest companies have raised nearly £18bn of capital over the past few months as they restructure their debt while there have been several big cash-calls from some of Europe’s most distressed companies. Land Securities was the latest to take the plunge last week, raising £775m. What was interesting is that while Land’s shares fell, it was by only 7 per cent to 511p – not bad considering the dilution.

Now rumours are swirling around HSBC. Europe’s biggest bank is said to be deciding whether it should go to investors for up to £13bn with a rights issue. HSBC is one of the few banks that has not had to raise money from governments or investors since the crisis. At 8.9 per cent, its tier one ratios are robust, but with the crisis deepening it does look as though it needs to bolster its balance sheet. It has not ruled out raising any new money and its shares slipped 4 per cent on Friday to 477p on the back of these rumours. Once investors get a clearer picture of HSBC’s US exposure to sub-prime when the bank presents results next week, they might even be jumping over themselves to buy at such a bargain price compared with last year’s high of 938p.

There couldn’t be a better time to back winners. As study after study shows, shares bought in distressed companies during troubled times usually end up outperforming the market. It’s why many of the “long-only funds”, and the hedge funds, are reallocating cash to take up some of these issues while they are at such a discount to market value – and will no doubt make juicy returns over the years. Corporate bonds, yielding up to 5 per cent, are also back in demand.

It is also a good time for private investors, but be prepared for a bumpy ride – this is the good part of the casino working.

Shut that door: Don’t call Yvette if you want to stop Harriet

Attempts to get Yvette Cooper, Chief Secretary to the Treasury, to put herself forward as the “Stop Harriet!” candidate in the phoney battle for the Labour leadership are delightfully Machiavellian. Clearly Jack Straw wants to stop Harriet Harman while others are pushing Cooper only to expose her ambitions.

But the most irritating aspect is the spin from both camps which says these women appeal to the women’s vote. When will the spin-meisters grow up and realise that women don’t vote for other women per se but those who offer pragmatic and inspirational policies. Cooper hasn’t won any votes with her ludicrous home information packs, while the way she has constantly blamed only “global” factors for the financial crisis has been risible.

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