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International Bank Bailouts

Written By Brian Hicks

Posted September 22, 2008

What a difference a day makes. That’s how long it took for Hank Paulson to go from limiting the Treasury’s mortgage bailout to "financial institutions with headquarters in the United States," to extending his powerful hand to international banks.

"If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Treasury Secretary Paulson told George Stephanopolous Sunday morning, on his ABC news magazine "This Week."

That’s a major pitch shift from 1:30 a.m. Saturday, when Paulson sent his original proposal to legislators and stipulated that global giants like UBS and Deutsche Bank wouldn’t get the same assistance as American banks.

Two days later, the $700 billion (at least) plan is being wrestled over on Capitol Hill, and we can expect plenty more key changes to the songsheet before we get enough of a chorus to make it official. There’s a House Financial Services hearing scheduled for Wednesday, a tentative Senate deadline of Friday for passage back to the President, and plenty of hot air we’ll hear in the meantime.

In the rest of the world’s top economies, caution is the word.

International Banks Hold Tight

Looking across the world, the 24-hour trading day means no one gets a breather, and the fact that Washington keeps making its biggest moves over the weekend doesn’t help.

Now, I would normally take Paulson’s shift as bullish news for international banks, because extension of American help could restore liquidity in places like Latin America, Eastern Europe and developing Asia where intrinsic economic momentum has been driving profits in global players BBVA (NYSE:BBV) and HSBC (NYSE:HBC). But the sad fact is that the bad debt hasn’t settled, and the assets the Treasury is supposed to be buying still don’t have a set price.

Yet as I noted last Friday, the Chinese government is actually looking to Washington as an exemplar of how to deal with a financial crisis. On this side of the ocean, Bloomberg opined that the Dow could have dropped to 8,300 with out the $105 billion of our money the Treasury dumped into commercial paper on Thursday.

Japan’s vice finance minister voiced restraint, saying, "At the moment, I don’t think Japan needs to launch a program similar to that of the United States."

That’s the standard across the G7 group of leading industrialized nations, even though their central banks pooled $180 billion Thursday with the Fed. On an individual level, our peers are more hesitant to crank up the money machines.

Anywhere in the rich world, voluntarily hemorrhaging taxpayer money is a hard political sell.

On Sunday, Japan’s Nikkei newspaper reported that six central banks may even start taking foreign-denominated assets as collateral. That’s huge, and shows us that anything to buffer the global system is being done. A resolution isn’t even on the horizon.

China’s Scandals End Differently

In China, however, they have scandals of their own that are far less abstract than what we’re dealing with on Wall Street or in London’s financial heart known as the City.

Here’s a test: Which of these phrases scares you more… "commercial paper default" or "poison baby formula"?

In our land of the failed and home of the bailed, incompetence now rules. But you can bet what money you have left that if the executives of the financial giants being yanked out of trouble by the U.S. government had been in China, there’d be no "golden parachutes."

Last year, a bribery and bogus pharmaceuticals scandal enraged the Beijing government and Chinese citizens alike. Estimates of how many died as a result of the fake drugs approved by food and drug safety regulator Zheng Xiaoyu varied, but last July when he was executed for dereliction of duty, officials and citizens cheered. "It was decided by the Politburo, so what can I say?" one law professor linked to the Chinese government told the Los Angeles Times.

This month, the fire retardant melamine – which caused a huge scare in the United States after being found in pet food last year – has shown up in milk distributed by China’s three biggest dairy companies. The man responsible for oversight in this case was the successor of the man who was put to death, and he has resigned. He is surely fearful of what’s in store.

Who’s to say what proper punishment should be for guys like former Fannie Mae CEO Daniel Mudd and Freddie Mac head Richard Syron. After all, they were a hair’s breadth away from getting a total of $24 million in severance pay despite having let their companies and this country veer into a disaster.

And when the government takes such sweeping control of free-flowing systems, you have a right to get a little spooked even if they tell you it’s for your own good. Actually, you should be even more scared when they tell you it’s for your own good.

You won’t find a politician, businessman, or convenience store worker who can really tell you where we’ll be next week. What you can do, though, is keep a close eye on your investments and minimize risk in your own accounts.



Sam Hopkins

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