Explosive rally as authorities take action

By Paul Niven, Head of Asset Allocation, at F&C Asset Management in London.

The end of a tumultuous week sees equity markets post some of the strongest gains in six years over hopes that the US authorities will announce a permanent solution to the current banking woes. In addition to possible plans to set up a US government agency to buy bank assets, the FSA and SEC have temporarily banned short selling of selected lists of financial stocks.

Last night, in the US, it was reported that Treasury Secretary Paulson and Chairman of the US Federal Reserve, Bernanke, are proposing a Resolution Trust Corporation style lifeboat for US financial institutions. The plan likely involves the movement of illiquid assets from US financials into a state backed institution. Full details of the plan are yet to be forthcoming, and legislation will be required in order to progress the vehicle, so detailed comment is supposition at present.

Nonetheless, as we previously stated this week, government intervention is a necessary condition for the end of the credit crisis to come into sight. Indeed, there are numerous precedents of government action enabling a line to be drawn under banking crises through history, such as the formation of the RTC in the late 1980s in the US and the Resolution Finance Corporation from the Great Depression era. Other examples of authorities intervening after market failure exist in the Swedish experience of the 1990s and the Asian crisis, where the IMF played a key role.

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2008-09-19 15:36:39 © Moneyextra.com