Money managers generally support the U.S. government's $700 billion takeover of non-performing mortgage assets to get the wheels of the financial system turning again, but they doubt this will prevent at least an economic downturn, if not a recession.
“There was no choice but for the Treasury and the Federal Reserve to step in, provide leadership to the markets and not allow financial intermediaries to go down,” said Tad Rivelle, chief investment officer at Metropolitan West Asset Management LLC, Los Angeles, which has $27 billion under management.
At press time, there was no agreement on Treasury Secretary Henry Paulson's proposed Troubled Asset Relief Program, or TARP, the largest government bailout since the Great Depression, because of opposition from Republican lawmakers. But Senate Majority Leader Harry Reid, D-Nev., said the Senate will remain in session until a deal is done.
The plan, which would boost the U.S. debt vs. gross domestic product ratio to as high as 79%, must pass both the House and the Senate, and be ratified by President Bush. The last time the U.S. debt vs. GDP ratio was above 70% was in 1954, when the U.S. was repaying its war debt; the record was 108.6% in 1946.
“But we are not looking at a long-term or permanent increase in government debt. This should be seen as a short-term increase in borrowing,” said Josh Feinman, chief economist in New York at DB Advisors, the asset management arm of Deutsche Bank AG, with $812 billion under management.
“I personally like the plan because the case-by-case solution did not work,” said Brian Gendreau, chief strategist at ING Investment Management in New York, referring to the government's intervention in the cases of Bear Stearns & Cos., Fannie Mae, Freddie Mac and American International Group Inc. “But we don't know and, frankly, nobody knows, whether it will work. The chairman of the Fed and the Treasury secretary could not provide any assurance. A lot will depend on the prices of these assets and the extent to which financial firms choose to participate. But what we do know is that doing nothing would have resulted in a disaster.” ING has $600 billion in assets under management.
James Weston, assistant professor of finance at Rice University in Houston, pointed out that “panic and crises are part of capitalism,” as greed drives asset bubbles whose bursting results in downturns.
“The recession is going to be bad ... Without the bailout, the recession could be gargantuanly worse,” Mr. Weston said.