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Wednesday,1 October 2008 16:0 hrs IST

Indian investors nervous on US bailout plan details

Indian investors are a nervous lot, and say the bailout bill announced by the Congress is a much
watered down version of what was expected and is needed to add liquidity in the system.

The Emergency Economic Stabilization Act of 2008 involves taxpayer guarantees and ceilings
on executive compensation. The Congress is slated to vote on the bailout bill Monday, and the
Senate vote is likely Wednesday.

“There are several major points for nervousness in the markets,” said Jagannadham
Thunuguntla, head of the capital markets arm of India’s fourth largest share brokerage firm, the
Delhi-based SMC Group.

“There is a lot of nervousness as also a large element of uncertainty,” confirmed Naresh

Pachisia, managing director of SKP Securities Ltd, eastern India’s largest distributor of financial
products and financial services firm.

“Two years back all asset classes across the world were moving up as there was a lot of liquidity
in the system,” Pachisia said.

“Right now there is no liquidity anywhere, so how can you expect markets to grow?” he said.

“The first major point of nervousness is that the US bailout plan will now be in three tranches of
$250 billion, then $100 billion and finally $350 billion and the second and third tranches will
require further Congressional approval,” Thunuguntla said.

“This means effectively, only $250 billion is now available for buying troubled assets of banks
instead of $700 billion outright,” he said, adding: “This doesn’t really solve the problem of

“The second point is that the plan requires that the Troubled Assets Relief Program (TARM) will
buy out troubled assets but it will have to sell off these illiquid assets within five years and earn
more than the $700 billion that will be used to buy them,” Thunuguntla said.

“If at the end of five years, the TARM is unable to earn more than $700 billion by selling off
illiquid assets, then the banks and institutions concerned, from whom the illiquid assets are now
being bought, will have to compensate the losses.”
“This again really means that the problem has just been deferred and not entirely removed and
nobody knows what will be the long-term consequences. This again does not solve the problem
of uncertainty,” Thunuguntla said.

“The third major concern is that the fallout of the US financial crisis is now appearing in the UK
and Europe. Bradford and Bingley, the largest moneylender to landlords in the UK and a major
bank in its own right has now been nationalised.”

“Similarly, another major European bank, Fortis of The Netherlands, is in trouble and is at the
centre of a three-country partial nationalisation after French bank BNP Paribus pulled out of
talks to buy it out.”

The Belgian, Dutch and Luxemburg governments invested 12 billion euros or $16.3 billion
Sunday night to pick up a 49 percent stake in Fortis.

Last year, Fortis in consortium with Royal Bank of Scotland of the UK, and the Spanish banking
giant Banco Santander, had acquired ABN-Amro Bank of the Netherlands.

Fortis’s share of the deal was $32 billion, which it had then taken from the market as bridge

“Now Fortis is in a liquidity crunch and is unable to repay the bridge loans,” Thunuguntla said.

“Even in the US, the crisis is far from over - Wachovia too will probably file for bankruptcy if its
talks with Citibank fail, and the credit-default swap rate for JP Morgan-Chase has shot up to
$15,200 from $12,200 per $1 million credit protection,” he said.

News that JP Morgan was the largest secured creditor of Lehman Bros with a loan of $23 billion
led to the rise in the credit default swap price, as the market now believes JP Morgan will have to
simply write off that credit.

The credit default swap is a market arrangement by which a lender can get some kind of cushion
or insurance on its lending. So the credit default swap price is a kind of insurance premium.

If anybody is lending to JP Morgan now and wants a credit default swap it will have to pay
$3,000 more for every $1 million of lending that the lender wants protected.

Meanwhile, the Financial Times newspaper of London reported Monday that troubled insurance
major AIG is considering selling more than 15 businesses in a bid to repay the $85 billion US
government loan it had taken earlier this month. The report said the 15 businesses included its
aircraft leasing unit, a stake in a large US reinsurer and billions of dollars in properties.

“The repercussions are slowly emerging and nobody knows what the final picture will look like,
but I think the market will get support at the 12,500 levels,” Pachisia said.

“But there is certainly all round nervousness,” he agreed.