A revised form of the original Treasury-sponsored bailout bill was hammered out by lawmakers over the weekend. It now goes before both houses of Congress for debate and passage.
While one might think the U.S. financial community has dodged a bullet, it's just one of many. Other concerns include:
1. Will the committee-approved plan be approved by the full Congress?
2. Will it be signed in time to save additional U.S. institutions?
3. Will it be enough to accomplish the required task of unfreezing credit markets?
4. If so, are we just back to U.S. Recession 101?
5. Will foreign central bankers need to develop their own bailout plans?
6. Are we headed for a global recession?
These are questions that are likely weighing on investors' minds and causing global markets and U.S. futures to tumble. We have been in this position several times over the past week or so. We believe the bill will be passed in fairly short order. In addition, the seizure of Washington Mutual (WM) was a reminder to congressional leaders of the need for a quick resolution. The reevaluation of the appropriateness of the Lehman Brothers bankruptcy is also a lesson in credit crisis management.
If the question is whether $700 billion will be enough to purchase all of the bad debt outstanding, I don't think anyone would say yes. But is it enough to get the markets rolling again? We think yes, but obviously only time will tell.
Potential for Global Recession
The unfortunate timing of the Fortis seizure adds another straw to this camel's back, as investors realize this crisis is not confined to the U.S, and that Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke can only resolve the U.S. issues.
If this crisis of confidence is finally resolved, we still have to worry about the potential for a global recession. S&P Economics sees the U.S. economy as being in recession already and forecasts negative gross domestic product (GDP) growth in the fourth quarter of 2008 and the first quarter of 2009. Europe and Japan are also teetering on recession.
Global Insight forecasts global GDP growth to advance 2.7% in 2009 after an expected rise of 3.0% in 2008. We are obviously concerned that these projections may end up being too optimistic. S&P's Equity Strategy Group continues to recommend a defensive sector posture.