Paulson’s rescue plan puts life back into markets

Paulson’s rescue plan puts life back into markets

Mumbai: Indian and global markets celebrated the US government’s grand plan in the making to stem the global credit crisis that involves spending hundreds of billions of dollars to rescue distressed financial institutions and helping them take mortgage derivatives and collateralized debt obligations, or CDOs, off their balance sheets.

The plan follows a series of recent financial bailouts by US central bank Federal Reserve, including the nationalization of mortgage players Fannie Mae and Freddie Mac and insurer American International Group Inc. (although the Fed has said it doesn’t intend to run the insurance firm), increasing temporary currency agreements or “swap lines" with key foreign central banks by $180 billion (Rs8.3 trillion), and providing huge overnight loans to US banks to fight the liquidity crisis.

On Friday evening India time, US treasury secretary Henry Paulson listed out the contours of the sweeping rescue plan of which some broad generic details have been known since Friday morning India time. He said that the package would involve “hundreds of billions of dollars".

The Dow Jones Industrial Average in the US gained more than 400 points on opening, before Paulson’s announcement Friday. At 8.30pm India time, the index was 301 points, or 2.7%, up at 11,321.

Earlier on Friday, the Bombay Stock Exchange’s benchmark Sensex index gained 726 points, or around 5.5%, to close at 14,042, but brokers and fund managers aren’t sanguine about the future of the index that posted its 10th largest gain in a day in absolute terms on Friday.

At the National Stock Exchange, the broader 50-stock Nifty index was up more than 200 points, or 5%, to 4,245.

In Asia, markets in China and Hong Kong gained the most, by over 9%.

Among the so-called Bric countries (Brazil, Russia, India and China), the Russian market gained the most.

Closed for the past two days to contain the slump in stock prices, trading in the Russian market had to be temporarily suspended after the benchmark MICEX index gained more than 25%.

On Friday, both the UK and the US market regulators announced a temporary ban on short-selling in financial stocks.

Friday’s gains mean that most global stock markets have recovered almost all losses suffered earlier this week, after the collapse of US-investment bank Lehman Brothers Holdings Inc. and the sale of Merrill Lynch and Co., to Bank of America Corp.

In India, the Sensex lost heavily between Monday and Wednesday. After plunging to this year’s low of around 12,500 in early morning trades on Thursday, the index started rising. It gained around 12% in the recovery rally on Thursday evening and posted sharp gains on Friday to end the week above 14,000.

Still, brokers and fund managers are not overtly optimistic on the direction and pace of the market. With the financial crisis seeming to be under control, at least for the time being, markets will “limp back to normalcy", said brokers and fund managers.

Many global economists, including Merrill Lynch’s David Rosenberg, have been calling for an RTC-style package for some time.

In the 1980s, the US government formed Resolution Trust Corp., or RTC, to inherit and then sell mortgage loans and other distressed assets of financial institutions.

“It is encouraging to learn overnight that (US) treasury secretary Henry Paulson is looking to create a repository for bad bank debt, and senators are voicing approval," said Mark Mathews, strategist at Merrill Lynch (Hong Kong), in a research note released Friday before Paulson’s announcement.

The regulatory intervention, however, comes at a point when global markets are already “oversold", said Rashesh Shah, chairman of Edelweiss Capital Ltd, one of India’s largest brokerage house.

Despite the euphoria across markets, “the hyper-velocity of money will slow down", and the strong selling by foreign institutional investors, or FIIs, could “continue till the end of this year," Shah added.

FIIs have sold around $9 billion in Indian stocks, net of purchases so far this year.

By the end of this year, the net FII outflow could go up to $12 billion, said Nilesh Shah, chief executive of local brokerage Ambit Capital Ltd.

However, domestic institutional investors continued to buy on Friday. This local support was largely responsible for the comeback rally staged by Sensex in the past five trading sessions.