FTSE up despite US bail-out flop

World markets tanked after the US Congress rejected a $700bn bail-out plan - but the FTSE has proved more resilient...

Last Updated: 31 Aug 2010

The failure of the US Government to get its $700bn bail-out package through the House of Representatives sent shockwaves through world markets overnight, with the Dow Jones index suffering a record 778 point fall and Asian exchanges also seeing precipitous drops. Most observers were naturally expecting a similar story when the UK markets opened this morning – yet after initial losses, the FTSE bounced back to last night’s levels. So are we on the verge of financial meltdown or not?

The biggest news of the last 24 hours has undoubtedly been the surprise failure of US Treasury Secretary Hank Paulson’s Troubled Asset Relief Program, which was designed to buy up toxic securities from the banks so they’d start lending again. Paulson has spent the last few days desperately trying to muster support for the bill from both sides of the House, adding in various measures to make it more palatable. But it clearly didn’t work: the bill eventually failed by 228 votes to 205, with two-thirds of Hank’s own party giving it the thumbs-down.

Indeed, opposition came from both sides of the political divide: Republicans were worried about a government solution to a free-market problem, while Democrats were clearly unconvinced about why Mom & Pop's tax dollars should be bailing out a load of rich bankers on Wall Street. Paulson and his boss President Bush have clearly failed miserably to convince people that it’s actually a bit more complicated than that, which won’t do wonders for their credibility. It’s also likely to accelerate the demise of other US banks: yesterday Wachovia became another casualty as it was snapped up on the cheap by Citigroup.

There’s still a chance that an amended version of the bill could make it through the House when it reconvenes on Thursday (after the Jewish holiday of Rosh Hashanah), particularly if the subsequent carnage in the world markets gives a few Congressmen cause to review their opposition (Hank says he’s already working on Plan B). In Ireland, state intervention certainly seems to have had the desired effect: after its stock exchange suffered its biggest ever one-day fall yesterday, shares in Irish banks surged this morning after the government promised to guarantee all their deposits and debts for two years.

But either way, it doesn’t have to mean the end of the financial world as we know it. Citigroup’s acquisition of Wachovia (with Government support) and the investment by Japanese group Mitsubishi UFG in Morgan Stanley show that there are private sector solutions out there. And as the resilience of the European markets today (the FTSE is actually marginally up at time of writing) suggests, wide-ranging interest rate cuts are surely now inevitable. So it’s not all doom and gloom...

PS. If like us, you need all the amusement you can get at the moment, you might also enjoy the second half of the FT's Lombard column today (The Problem with Bail-outs)...

In today's bulletin:
FTSE up despite US bail-out flop
Tesco beats crunch with big sales hike
Sky gets regulatory double whammy
Consultants suffer in Tory council tax freeze
You can't trust les rosbifs

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