Say Goodbye to Low Hanging Fruit as US Bailout Hits the Wall

It was bound to happen eventually – the US bailout plan, following another massive hit from black-hole insurer AIG (who requested another $40 billion from the Treasury plan on Monday), is about to run short of cash. Following AIG’s latest dip, the Fed’s scheme – which is currently only sanctioned to spend $350 billion of the total $700 billion requested from Congress (and had already pumped $250 billion into failing banks) – is left with a meagre $60 billion.

With smaller companies like American Express forming bank holding companies so they can access some of the funds, the Fed is beginning to warn boutique insures and smaller lenders that the money is running low, and to force those asking for governement cash to also look for supplementary private funds. The WSJ reports today that Henry Paulson is expected to announce a new phase of the bailout this week, which requires institutions looking for government cash to raise an equal portion from private capital. The article reported Douglas Elmendorf, a member of the Obama transition team, as saying: “This idea has the great virtue of incorporating private-sector judgment on the viability and management of these financial firms.”

In other words, once the fundamentals of the banking system are stabilised, it shouldn’t be up to the government to pick winners and losers. Makes perfect sense to me, and perhaps will weigh on the debate about the HBOS/Llloyds un-merger, which currently seems bouyed by the idea that government money for bailouts is essentially to be treated like low hanging fruit.

Posted by Daniel Stacey in Hot Money | November 12, 2008 10:59AM |