New U.S. president Mr. Barack Obama's newly designed and reinforced financial team of experts, ander the direction and supervision of Obama, pores and ponders over several options to tackle the financial crisis. This has raised panic about the financial health of leading banks around the world.
A brief, but authentic and updated account of the possible measures to be taken by Obama administration to resolve the crisis of banking sector is given below:
U.S. government led by Obama now plans to create one or more "bad" banks to hold all the toxic mortgage-based and other hard-to-sell assets worth hundreds of billions of dollars which are acquired from commercial banks. Those who support this idea argue that commercial banks relieved of toxic, useless assets would become more acceptable to potential investors. They can also resume business lending to companies and investors & thus, help to avoid the risk of a long recession.
Last year when the U.S. government first came up with a similar kind of plan, one challenge had been observed: how to settle on prices for directly purchasing all the assets from banks? If those had been bought too cheaply, perhaps the banks would have to report more losses; that would, in turn, threaten their financial health once again. And paying too much to buy them would waste the money of all taxpayers.
The potentially huge amount of money required to fund such an operation is another problem. All the investors including the central banks of China and Japan finance America's financial deficits by buying the bonds; they need to be assured and feel confident about its public finances. Mr. Obama's team could also place the bad assets with existing specialized managers of private funds.
New administration of Obama has already given the promise to guarantee potential losses faced by some of the biggest U.S. banks which could yet be incurred by their bad assets. In the month of November, the U.S. Treasury helped give guarantee up to an amount of $306 billion in risky assets held by Citigroup, for example. But it may be a more complicated process to set up these loan guarantees on a case-by-case basis than even establishing a bad bank.
Some economists are even saying that when it comes to assuring these investors that fast action is being taken to go to the root of the crisis and resolve it, these new loss guarantees do not work much.
NATIONALIZE ALL THESE BANKS?
The U.S. government is already an important shareholder in some leading banks, like- Citigroup. But according to some investors, it may undertake them completely; it may even effectively nationalize their bad loans.
There is a high chance that Mr. Obama's team would use its influence as a powerful shareholder in banks to press them to lend more amount of money.