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The financial-rescue plan that Treasury Secretary Timothy Geithner is set to unveil today (February 10, 2009) could well determine how effective the stimulus will be as a whole, but the as yet unheard strategies are already dividing both bankers and investors.

For the plan to work the government will need to borrow in order to invest in things such as new business projects, credit for purchases of new cars, homes and appliances and if it can’t get the money then companies and households will be unable do their supposed part, which would be to spend the economy out of its present mess.

Former Federal Reserve Governor Lyle Gramley had this to say, “We’re going to get limited benefit from the stimulus program unless people can finance their normal operations and we really haven’t seen any breakthrough yet in the credit logjam”.

Investors are seeking a 5.2 percentage-point premium over U.S. Treasuries to buy bonds being sold by companies with investment- grade ratings which is over five times the level that it was two years ago and the rate on jumbo mortgages is 6.91 percent, almost 1% higher than at the start of 2007.

There is almost unanimous agreement that something needs to be done and done soon to get the economy out of its present doldrums but there’s not much consensus on how to do it however.

Christopher Whalen, who is the managing director of ‘Institutional Risk Analytics said in an interview yesterday,

“If banks can’t move mortgages off their books, then we have a problem. We will see credit availability much lower” than in past generations. We have got to fix the financial system and if we don’t deal with this, we will not get anything else done”

Stuart Eizenstat, who is a former deputy Treasury secretary in the Clinton administration said,

“The government will in effect put a floor under those assets. If the value goes up, the investor gets the benefit. If the value goes down, the government picks up that, but it’s much less of an immediate expenditure than you would have if you purchased them. Guarantees may also play a role for investments banks intend to hold to maturity”

Furthermore, many would be investors also remain unconvinced that the government is moving in the right direction.

“It will be a bad decision for a hedge fund to invest in these illiquid assets. You’ll end up running into the same problems as the banks and the hedge fund industry is suffering as it is already” announced Kenneth Windheim who is the chief investment officer of ‘Strategic Fixed Income LLC’, that manages $1.7 billion in assets and invests with hedge funds.

The financial rescue needs to “create an improving credit market to ensure that the stimulus works”, said Bruce Kasman who is the chief economist at ‘JPMorgan Chase & Co.’ in New York and is a former Fed researcher.

Another possibility that officials and regulators have suggested is the setting up of a government-funded “bad bank” that would buy up most if not all of the toxic debt but New York Senator Charles Schumer said that it would be “very expensive and cost as much as $4 trillion, and risked setting values for the securities so low that every other bank would go bankrupt”.

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If the stimulus package that the U.S. congress is proposing is completed in its present form it will raise the government’s financial commitments to $9.7 trillion and the pledges amount to almost two-thirds of the value of everything that was produced in the U.S. last year!

How big is $9.7 trillion?

To put it into perspective, it’s enough to pay off more than 90% of the nation’s home mortgages or enough to send a $1,430 check to every man, woman and child alive in the entire world!

Over the course of the last two years ‘The Federal Reserve, Treasury Department’ and ‘Federal Deposit Insurance Corporation’ have either lent or spent close to $3 trillion and they have pledged to provide up to $5.7 trillion more.

The ‘Troubled Asset Relief Program’ (TAR) which was approved four months ago was granted $700 billion and since then an additional $168 billion in tax cuts and rebates have been approved.

So who will get the other $8 trillion?

· Well none of the names have been disclosed, but the money will supposedly be used for lending programs and guarantees, all of which will be under the authority of the Fed and the FDIC.

What’s more, the commitments are expected to grow even more in the very near future!

The Treasury postponed a planned announcement about new guarantees for illiquid assets to insure against losses without taking them off banks’ balance sheets and said that the announcement will only be made after the Senate votes on the stimulus package.

The Fed said on Friday, February 2009, that it will delay the start of a $200 billion program called the ‘Term Asset-Backed Securities Loan Facility’ (TALF) which is intended to revive the market for securities that are based on consumer loans for credit-cards, automobiles and students.

When Congress approved TARP on Oct. 3 2008, both Fed Chairman Ben S. Bernanke and Henry Paulson who was then Treasury Secretary accepted the need for transparency and oversight but so far the Federal Reserve has refused to disclose loan recipients or reveal the collateral that they are getting!

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