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TARP Revisited as Banking Sector Battles and US Economy Continues to Weaken

19 January 2009 - News - Editor

Following a volatile week on Wall Street, and with the inauguration of Barack Obama as the new President of the United States right on the doorstep, analysts and investors are watching with great interest to see how the new administration will handle the distribution of the remaining $350 billion of the $700 billion set aside for TARP – the Troubled Assets Relief Program. The scheme has already been somewhat controversial with critics highlighting the fact that the $350 billion already spent has not actually been used to buy troubled assets. However, with the US government’s rescue efforts being undermined by the deepening financial crisis, federal officials are reportedly revisiting the original bailout plan, that of taking toxic assets off the balance sheets of embattled financial institutions, with the view to breathing some life back into the ailing credit market.

With banks continuing to rack up multi-billion dollar losses, incoming President Barack Obama’s finance team has been consulting with Bush administration officials in order to implement further rescue measures without delay. The Obama administration’s senior political strategist, David Axelrod, has revealed that the new president will have a “strong message” for bankers and that the emphasis will be on getting credit flowing again. There is much speculation as to how this will be achieved and many are taking a wait-and-see attitude, as any decisions taken in this regard are likely to have a significant effect on stock markets, not only in the United States, but with a ripple effect on a global scale.Meanwhile Citigroup, which was rescued by some of the initial TARP fund distribution, has reported a fourth quarter loss in excess of $8 billion, being its fifth straight quarterly loss and tallying up to a loss of more than $18 for 2008. In an effort to allow the bank to focus on its core business, Citigroup will be split into two operating units, being Citi Holdings and Citicorp. Chief Executive of Citigroup, Vikram Pandit, expressed his confidence that with a “streamlined set of businesses” Citicorp can be expected to be a “high-return and high-growth business”, while Citi Holdings will be in a better position to tighten risk management and credit quality. Citicorp will incorporate the company’s retail and business banking units which has banking franchises in the United States, Asia, Latin America, the Middle East and Central and Eastern Europe with assets totalling more than $1 trillion.

Analysts are anticipating the week to start with a spark of inauguration-day enthusiasm on the markets, but this is expected to be dampened by disappointing fourth quarter results by many of the more than 180 companies that will be releasing their figures in the upcoming week. Of the ten economic sectors, seven are expected to report declines, with only healthcare, consumer staples and utilities expected to show any growth, albeit all in low single digits. Certainly the week ahead poses many challenges for stock market players, who have come to expect the unexpected, and will be anything but dull.

 


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