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FINANCIAL SYSTEM IN CRISIS

Moods may lift before markets do

The bailout will calm nerves but the banking industry and credit system won't spring right back, experts say.

September 29, 2008|Walter Hamilton and Tom Petruno | Times Staff Writers

NEW YORK — The tentative agreement Sunday on a $700-billion financial system rescue package would provide a badly needed psychological boost on Wall Street but wouldn't be an immediate panacea for the economy or housing market, experts predicted.

Though crucial details of the package remain unknown -- including how much the government would pay for the radioactive mortgage loans and securities -- the agreement itself should help to stabilize financial markets, especially the badly scarred credit markets, they said.

In practical terms, it would finally give institutions of all sizes a way to toss off the albatross of billions of dollars in troubled assets that weighed on their operations and, in some cases, threatened their viability.

Beyond that, the ambitious size and scope of the package should calm jangled nerves and bolster overall confidence in a financial system that has been badly shaken in recent weeks. The failure to cobble together a package could have been disastrous, experts said.

"Wall Street will applaud the simple fact that we have an agreement," said Hugh Johnson, chief investment officer at Johnson Illington Advisors. "It may not be perfect or quite what Wall Street wanted but it's better than nothing."

The bailout even could prove to be a boon for some Wall Street Goliaths, including well-regarded money-management firms Pacific Investment Management Co. and BlackRock Inc., that have dodged the mortgage meltdown and even thrived. Such firms could earn millions of dollars if hired by the Treasury Department to help manage assets it buys.

The stock market and possibly the credit markets are likely to rally today if Wall Street follows the pattern it has after previous government interventions, such as federal actions to push Bear Stearns Cos. into a takeover by JPMorgan Chase & Co. and to bail out Fannie Mae and Freddie Mac.

But those other rallies were short-lived, and once the initial relief of the current bailout wears off, it's doubtful that the banking system or the credit markets would immediately spring back to life, experts said.

It could take weeks for the arcane but essential nuts-and-bolts elements of the plan to become clear. And even when they do, it's unlikely that banks would quickly reopen the spigots and provide free-flowing credit to businesses and consumers.

"The system has been shocked more in the past month than it has since the Great Depression," said Howard Simons, fixed-income strategist at Bianco Research in Chicago. "That will take time to dissipate."

The most pressing test will come in the credit markets, which ground to a near-halt in the last two weeks as banks hoarded cash and rates for even the safest of short-term loans shot up drastically.

That clipped businesses, especially smaller ones, that rely on the market for commercial paper and other short-term loans for such routine operations as making payroll and funding working capital.

Banks may initially focus on repairing their tattered balance sheets, and expand their lending only when the crisis ebbs and the economy bottoms.

The bailout plan "can help but there's not going to be an instant-pudding type of response," said Brian Bethune, an economist at Global Insight Inc. in Waltham, Mass.

The package also won't directly help the economy, where job losses are mounting and consumer confidence is low.

The federal bailout of the U.S. financial system will be too late to stop more pillars of the global banking business from toppling in the near term, experts said.

Wachovia Corp. may be the next U.S. banking giant forced to sell itself after its shares dived 47% last week. Citigroup Inc. and Wells Fargo & Co. were said to be considering offers for the Charlotte, N.C., company, which has been hammered by losses on mortgage loans it acquired with the purchase of California's Golden West Financial in 2006.

Meanwhile, the already-bad situation in Europe worsened over the weekend. The governments of Belgium, the Netherlands and Luxembourg on Sunday agreed to invest $16.3 billion in Fortis, the Dutch-Belgian financial services titan, to essentially nationalize the company. It has been sinking under the weight of bad loans, including U.S. mortgage securities.

Britain also was expected to announce today a plan to nationalize Bradford & Bingley, one of the country's biggest mortgage lenders.

In the U.S., confidence in financial markets has been shattered by the government's seizure of mortgage giants Fannie Mae and Freddie Mac, the failure of investment bank Lehman Bros. Holdings Inc. and the near-collapse of insurance titan American International Group Inc.

Fear of another massive wave of failures has shut down many parts of the credit markets in the last two weeks, as banks have refused to lend to one another and investors have hoarded cash.

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