Concerns grow over US bail-out plan

Concerns were growing today over the effectiveness of the US government’s US$700bn (€507bn) bank bail-out scheme.

The revised plan, which will see the US government buy up so-called toxic assets from banks with large operations in the country, was passed by the House of Representatives on Friday after being rejected earlier in the week.

It is hoped that by taking these assets off companies’ balance sheets, confidence will return to the banking sector, increasing liquidity in the credit markets as banks once again lend to each other.

But some analysts are warning that the scheme could trigger a new round of write downs by the banks as they are forced to calculate the value of their toxic assets, while others have predicted that banks will snub the scheme and instead decide to hold on to the complex products.

There are also concerns about the price that will be paid for the assets by the US government.

It is thought that if the Federal Reserve pitches this too high it will run into heavy criticism, while if the price is too low the scheme will fail to work.

The bail-out could also potentially have a negative impact on banks that are not even taking part in it, as plans to buy-up the assets from other banks, will effectively give them a market price, meaning other institutions may have to announce new write-downs, according to the Mail on Sunday newspaper.

The Observer newspaper also warned that banks may be put off taking part by restrictions on executive pay and the banning of so-called golden parachutes, one of the strings attached to the deal.

It added that sources close to Goldman Sachs and Merrill Lynch had indicated that the banks may not participate in the scheme as there is a growing feeling on Wall Street that the market may be bottoming out.

It is believed that the presence of the Government as buyers may help to get the markets moving again, regardless of whether firms actually sell their assets.

Meanwhile, Ken Rogoff, the former chief economist at the International Monetary Fund, said the rescue package would not work as the $700bn (€507bn) being put forward fell far sort of the $2 trillion (€1.14 trillion) that was needed, according to the Sunday Telegraph.