That US $700bn Toxic Fund

16 January 2009 - That US $700bn toxic fund

The diary entry of 13th November 08 referred back to an article on this website written before the diary itself started in early October 08. It concerned the setting up of a so-called toxic fund to buy up bad assets and place them in a sort of bad bank (that could be destined for the UK too in the near future). Only now is the US Senate voting on whether to release the second tranche of this fund amounting to $350bn. Like the first instalment, it is not likely to go directly to banks but preferentially to things like the stalled housing market. If the funds are released (that is, created out of thin air) and wherever it goes, it begs the question of how are the big US banks actually fairing. The answer is very badly. Yesterday the shares of both Citigroup and Bank of America fell by 25% and between them these two big banks have absorbed $70bn of US government funds in capital injections. Citigroup is expected to announce a loss of about $10bn for its fourth quarter. There are rumours that it will have to be nationalised within days.

Back in Europe, the central bank has cut interest rates by a further one-half % point to stand at 2% and has resorted to what has been called "stealth easing" in an effort to shore up Europe’s credit system. It has done this by letting its overnight rate drop to 1%, an all time low. Many commentators feel that the ECB has fallen way behind in the action stakes and not fully recognised that, for example, the largest economy in its zone, that of Germany, is likely to have shrunk at an annual rate of 8% in the final quarter of 2008.

Meantime, the issuance of corporate bonds by big blue chip UK companies is at a high ebb as these big businesses build their balance sheets whilst banks continue their reluctance to lend. To attract Joe public the coupon is typically 8% to 9%, a far cry from bank deposit rates

The answer to yesterday’s poser is Ireland.