The Big Question: Why are Spanish banks in such rude health when ours (that is the UK) are ailing?
By Elizabeth Nash, The Independent,
Tuesday,  September 30, 2008.

Why are we asking this now?

Spain’s biggest banking group, Santander, yesterday galloped to the rescue of Bradford and Bingley, the latest British bank to hit the skids, saving it from bankruptcy and probably further economic meltdown.

Why is a Spanish bank so keen to expand into Britain?

It’s part of Santander’s grand plan to become the world’s top bank. It is already the leading bank in the Eurozone, No1 in Latin America, and seventh in the world by market share. Once it’s consolidated its presence in the British market, it plans to conquer the US. Growth is its watchword. “The aim is to be second to none,” the bank says in its characteristically immodest way.

Hasn’t Santander already established quite a presence in Britain?

Yes, it chummed up with the Royal Bank of Scotland in 1988 and got a seat on the board, which gave Santander a window on the world that was invaluable when it developed ambitions of international expansion.

Four years ago it acquired Abbey National, and it is still digesting Alliance & Leicester which it bought for a song in July. You have to remember that the Banco Santander began as a local family-run operation in the northern Spanish city whose name it bears. There’s not much it doesn’t know about how small regional banks work.

So who is the guiding hand behind this grand invasion?

Santander is run by the charismatic Emilio Botin, 73, the latest patriarch of this great Spanish banking dynasty, an astute predator steeped in the business to his fingertips. At the pinnacle of the most powerful business operation in Spain, he is arguably the country’s most influential man. When Botin endorsed Spain’s incoming socialist prime minister Jose Luis Rodriguez Zapatero in 2004, a jittery stock market calmed down instantly.

How has Santander got this far?

The bank has a record of homing in on distressed banks, even lumbering shareholders with apparently hopeless liabilities, as when it scooped up Spain’s Banesto bank in 1995, when it was a multimillion pound black hole ruined by a reckless fraudster. Botin put his daughter Ana Patricia – who will probably succeed when the old man eventually retires – in charge of the operation and she turned it round within five years.

Santander then swallowed Banco Central Hispano in 1995, which enabled it enter the turbulent Latin American market, to the alarm of more cautious operators. Within 10 years Santander consolidated itself as the top bank in the region, and turned its attention to Europe.

How has Santander avoided being savaged by the banking crisis?

Santander never got embroiled in dodgy loans or toxic mortgages, which it regarded as too complicated and unacceptably risky. While the world financial system juddered under the fallout of subprime loans, Sanatander declared its exposure to high-risk mortgages as “zero”. Botin loftily told his shareholders, “We don’t have those strange things.”

So how do Spaniards get their mortgages?

Mortgages in Spain are mostly handled by savings banks, which aren’t quoted on the stock exchange. Some of these became over-generous in dishing out loans during the recent long property boom, and since the bubble burst many face liquidity problems.

Spain’s banking supremos are in general an austere, cautious lot, with none of the buccaneering recklessness of many international counterparts. They are rich, of course, but frugal and philanthropic. If the Botins appear in public, it’s probably to endow a university or science park. You will never see them in the pages of Hola!

So how did Santander come out on top?

As well as knowing the market inside out, Santander’s top brass, ie Mr Botin, the indusputed boss, has an astute sense of market timing. Last year the bank conducted the real estate operation of the century by selling off all its 1,200 properties at the peak of the property boom, including wedding cake palaces in the heart of Spain’s major cities. Pulled off just before the market crashed, the deal netted Santander 4bn euros – which neatly funded last year’s purchase, jointly with its affiliate the Royal Bank of Scotland, of the Dutch bank ABN Amro. It cannily held on to all its branches, however – the bits that make money – and even remains tenant of the properties it sold, with an option to buy back in the future.

How will Santander’s increased presence affect Britain’s high-street banks?

We can expect to see more of Santander’s scarlet flame logo as the old names Abbey, Alliance& Leicester and Bradford&Bingley gradually fade away. In acquiring B&B – as in all its acquisitions – the Spanish bank has been careful to peel away and sell off the liabilities it doesn’t want, to home in on the elements of its core business: branches, and bank deposits.

So having lots of branches is the key to banking success?

That’s the Santander way. It may seem like boring stuff to braver bankers, but Santander believes we need more branches – in Spain there’s a bank on every street corner – and that these are the source of steady money, what Mr Botin calls “high-quality, recurrent earnings”. However, Santander is ruthless in stripping out what he doesn’t need, so bank employees may fear for their jobs.

Will Santander be satisfied, or will it want more of the British market?

History suggests Santander will be eager for another good bargain, especially in the current landscape of smouldering wreckage. The predatory Mr Botin, his coffers plumped with cash, must already be on the alert for further acquisitions, if not immediately. But this is the best moment for him. As he put it recently: “In times of crisis, being better than the others is a big advantage.”

So will the B&B takeover benefit British consumers?

Yes

*Santander has saved B&B from ruin, and account holders can feel their savings and deposits are safe.

*Santander’s low risk policy suggests it will be a steadying influence on Britain’s future banking scene.

*Without Santander’s action, the alternative could have been a wider meltdown too awful to contemplate.

No

*Santander’s move reinforces the concentration of Britain’s banks in the hands of a powerful few.

*Santander has a mixed reputation for its service, and it is strong enough to brush off complaints.

*Savings are better handled by local building societies than by banks answerable only to shareholders.

 e.nash at independent.co.uk

===========

Some of our pointers - A Socialist Prime Minister in Spain; A retreat from Iraq; A US Presidential candidate - John McCain who seemingly thought Spain was an enemy of the US for not following Washington’s edicts like many other lemmings.

Mr. Botin will not laugh, he will not even chuckle - he will just go about his solid business and will not eat chuff. His daughter will yake over after him - a solid Spanish woman - He backed Zapatero rather then a Sarah Palin.

Further, we know Bank Santander in New York - among its many philantropies right here - it is also the host for many solid meetings of the New York based “Foreign Policy Association.”  The Bank Manager in the US comes to listen and mingle with the crowd.

From The European Parliament - September 30, 2008:   Europe props up crumbling banks.

European governments were forced to rescue a number of financial institutions hit by the US-born crisis, sending stock markets plummeting, reports Deutsche Welle.

Washington’s rejection of a 700 billion dollar bailout caused world markets to plummet, it says.

Only a few weeks ago, banks in the eurozone financial sector were said to be safe from the US-born financial crisis, but now, as the global financial situation gradually worsens, five European governments have had to step in to prop up financial institutions, the paper goes on.

France is to inject €1bn into ailing Franco-Belgian bank, Dexia, which will receive €6.4bn in total, with the rest made up from donations from Belgium and Luxembourg, according to Le Figaro.

In Ireland, meanwhile, the government has placed a two-year guarantee on all deposits and certain debts in six major Irish banks, says the Irish Times, in a move it says is to “safeguard the Irish financial system”.

—————

Europe scrambles to save banking system: Banking stocks took a major hit across Europe after news the US bailout had failed.

LEIGH PHILLIPS, The EUobserver, September 30, 2008.

European authorities in Brussels, Frankfurt and at EU member state level are scrambling to save the continent’s financial system after bank stocks plunged when US lawmakers rejected a $700 billion bailout of Wall Street on Monday (29 September).

Banks are petrified of lending to one another for more than one day, requiring central banks to flood their coffers with the money they need to stay in business.

After yesterday’s part-nationalisation of Belgo-Dutch banking giant Fortis and the nationalisation of the UK’s Bradford & Bingley, Belgium-based Dexia, the biggest provider of lending to local governments in the world, could be the next financial institution to be rescued by taxpayers.

In an email from Belgian Prime Minister Yves Leterme, the country’s federal government reached an agreement with Belgium’s regional assemblies to jointly support the bank, Bloomberg News reported.

Even French President Nicolas Sarkozy has joined the rescue operation, despite the bank being headquartered in Belgium, issuing directions that the state investment body Caisse Des Depots offer Dexia funds.

***

Elsewhere, the German government backed by a series of private banks bailed out collapsing mortgage lender Hypo Real Estate reportedly to the tune of €35 billion, according to the German Ministry of Finance.

The list of nationalisations is rapidly growing, with Iceland - not an EU member state - also nationalising the country’s third largest bank, Glitner. The government has taken out a 75 percent stake in the firm in return for €600 million.

The Icelandic bailout is a larger per capita rescue operation than even the failed US $700 billion plan, representing some €2,000 for every Icelander. Following the move, the Icelandic Krona dropped to its lowest level ever against the euro.

***

Russia’s Prime Minister, Vladimir Putin, has rushed to the forefront in the crisis, announcing authorities will offer domestic banks a fresh $50 billion atop the $120 billion already supplied.

***

In perhaps the most frightening development, banks have deposited some €28 billion with the European Central Bank, afraid of leaving it stashed anywhere else, according to reports in the UK’s Daily Telegraph, quoting Hans Redeker, currency chief at France’s BNP Paribas.

“The ECB is no longer able to inject liquidity because the money is just coming back to them again,” the British paper quotes the banker as saying.

***

Bank stocks plunge:

Meanwhile, European bank stocks dropped through the floor on Monday, with Germany’s Aareal and Commerzbank particularly badly knocked down, taking a 42 percent and 22 percent hit to share prices. Ireland’s Anglo-Irish Bank was down 46 percent and Allied Irish down 16 percent.

Italy’s Unicredit, Sweden’s Swedbank and France’s Natixis all took a bruising as well, while a host of smaller banks in Denmark are set to collapse, according to the Financial Times. Spanish operations too are struggling.

On Monday, the European Banking Federation tried to reassure citizens that the financial sector was on a sound footing despite the crisis, and that depositors’ savings were not at risk.

“The global economy is facing an unprecedented crisis which is generating a certain degree of anguish due to the financial failure of some major banks,” the EBF said in a press statement.

“The European banking system will weather the storm,” the statement read, adding: “In EU countries retail deposits are insured.”

***

EU timetable:

French President Nicolas Sarkozy will meet bank and insurance company directors on Tuesday to assess the financial sector’s situation in his country, his office announced.

European Commission President Jose Manuel Barroso also said that a “structural European response” was currently being prepared for the summit of European leaders in two weeks’ time.

Additionally, on Wednesday, EU internal market commissioner Charlie McCreevy is to unveil a tripartite reform of European banks’ capital requirements.

———————-

Russia has a monetary surplus - will this now become its entree card to a tighter relationship with the EU?

Is this the beginning of a realignment that will see a Europe-Russia new economic bloc and a US-China economy tie-up?

Austrian far right scores big win.
VALENTINA POP, The EUobserver, September 29, 2008.

With the Social Democrats and centrist People’s Party hitting their most historic lows since 1945, Austrian elections on Sunday saw two far-right parties doubling and almost tripling their seats in parliament. The result could lead to a new coalition involving the right-wing extremists, despite EU sanctions having been applied to a similar government in 2000.

Hard bargaining lies ahead in attempts to form a governing coalition, as no party has scored over 30 percent, and a minority government would be a first in Austria.

The Social Democrats, who won the most votes - 29.7 percent, down from 35 percent in 2006 - are ruling out any alliance with the anti-immigrant Freedom Party (FPO) - up seven points to 18 percent - or the Alliance for Austria’s Future (BZO), led by Nazi-fan Jorg Haider, which jumped from four to 11 percent.

According to Social Democratic leader Werner Faymann, the centrist People’s Party (OVP) remains their preferred coalition partner, despite the fact that the same such coalition formula led to the current early elections. But the OVP, which also hit a historic low on Sunday - plummenting from 34 to 25.6 percent - has not ruled out talks with the far-right groups.

Although together they account for the second largest block in the Parliament, FPO and BZO remain divided. FPO chairperson Heinz-Christian Strache said there will be no alliance with his former party boss Jorg Haider, and has called for the SPO or OVP to enter a two-coalition government with him as chancellor.

Meanwhile, Mr Haider has left all options open and is enjoying his comeback after years spent on the sidelines following a 2000 scandal when the EU imposed symbolic sanctions on Austria after his party at the time, the FPO, joined a government coalition with the People’s Party.

Back then, 14 EU member states suspended bilateral relations with Austria, putting the alpine country in a “diplomatic freeze.”

“The phoenix of Carinthia spreads his wings over all Austria,” writes Frankfurter Allgemeine Zeitung about Mr Haider’s political resurrection.

***

EU sanctions unlikely!

In the event that the far right ends up in a government coalition, the EU however may be reluctant to repeat the 2000 sanctions move, which proved counter-productive and increased the popularity of such movements.

However, according to Article 7 of the Nice Treaty, which still applies today, the EU should react when “a clear danger exists of a member state committing a serious breach of fundamental rights.” If this occurs, the qualified majority of the EU’s heads of state may suspend certain EU council voting rights of the country concerned.

EU to build ‘Motorways of the Sea’
HELENA SPONGENBERG, for the EUobsever, September 29, 2008.

EUOBSERVER / FOCUS – The European Union wants to move more transport off the roads and onto the sea in an effort to fight growing congestion and greenhouse gas emissions in Europe.

The so-called Motorways of the Sea (MoS) are set to make fundamental changes to the European transport sector as a “real competitive alternative to land transport,” according to the European Commission, which wants the Motorways of the Sea to be as simple to use within ten years time as the trucking of goods on land is today.

The EU executive wants to see set up regular maritime links between different EU seaports, to form a transportation system – for both goods and people – at sea, which will overcome road transport bottlenecks while at the same time reaching the 27-member bloc’s outlying regions and islands more easily.

In its 2007, Report on the Motorways of the Sea, the EU executive states that “both energy consumption and emissions of greenhouse gases per tonne-kilometre are lower than for any other mode of land-based transport and the investment costs for Motorways of the Sea are only a fraction of the cost of new terrestrial motorways.”

The Motorways of the Sea concept was first introduced within the EU executive’s White Paper on European Transport Policy back in 2001.

So far, four MoS corridors are underway to be fully working by 2010, which are divided into the Baltic Sea, the ‘Sea of Western Europe’, the ‘Sea of South-East Europe’ and the ‘Sea of South-West Europe’.

Brussels is providing financial support for the start up of MoS projects and for investment in the infrastructure needed for such plans through the TEN T programme and the Marco Polo programme, which have a combined budget of €700 million for the period 2007-2013 for transport and maritime projects in the bloc.

The financial support is offered despite the EU executive arguing that the setting up of viable Motorways of the Sea links should ultimately be delivered through private sector initiatives.

EU member states and the commission are also currently looking into how to smooth the progress of state aid to the development of ports and infrastructure connecting the ports with inland transport.

The European Commission expect to take a first step already during this autumn in the form of a clearer and more coherent interpretation of the state aid guidelines for maritime transport.

EU transport ministers gathering at an informal meeting in La Rochelle at the beginning of the month discussed among other things how to ease the funding procedures for the further development of the Motorways of the Sea, including state aid and how the European Investment Bank can help.

Earlier this month the European Investment Bank signed a €81 million loan deal with the Grimaldi Group, an Italian private shipping company, aimed at expanding its fleet for the Motorways of the Sea in the Mediterranean.

In relation to the loan, Emanuele Grimaldi from the Grimaldi Group described in a statement that the Motorways of the Sea are “a strategic infrastructure that is often underrated but which is crucial for economic growth and European cohesion.”

Europe’s economy needs Europe’s seas and large river systems for increased diverse mobility in order to continue on a path of sustainable growth, in accordance with the Lisbon agenda, argues the commission.

Market-driven

However, some worry about how funding for Motorways of the Sea might have an adverse effect on competition.

“On the one hand, we support the development of short-haul maritime transport as an environmental-friendly alternative to road transport, but on the other hand, we are wary of the implications this may have on competition between ports,” Patrick Verhoeven from the European Sea Ports Organisation (ESPO) told the EUobserver.

“In our view, the [MoS] concept should essentially be market-driven, and financial support under the EU umbrella should focus mainly on infrastructure, especially where it concerns hinterland connections to and from ports,” Mr Verhoeven added.

He also pointed out that MoS routes should not be “artificially” created with government or EU funds, but be created from demand and said that “other critical factors” included the need for more flexible customs, administrative procedures and efficient services in the ports.

Alfons Guinier from the European Community Ship-owners’ Association (ECSA) agrees that the administrative burden is still too big when it comes to shipping in Europe.

“A lot has happened but there is still much to do to improve short-sea shipping in Europe,” he told the EUobserver.

Mr Guinier argued that customs, for example, should differentiate more between goods from EU countries and non-EU countries, which would lead to a smaller customs burden for EU goods and thereby improve the movements of goods by sea within the European Union.

According to the European Commission, the administrative burden for the Motorways of the Sea will be reduced through a forthcoming ‘maritime space without barriers’ initiative, which is expected to come out this autumn.

From:    swithana at ieep.eu
Subject: New Report – Climate Change and Sustainable Energy Policies in Europe and the United States
Date: September 29, 2008.

IEEP and our partner, the Natural Resources Defense Council (NRDC) have published a report on “Climate Change and Sustainable Energy Policies in Europe and the United States”. This report includes the main conclusions of our joint project - Transatlantic Platform for Action on the Global Environment (T-PAGE). T-PAGE has provided a platform for debate to stimulate dialogue and exchange of experiences between environmental NGOs, academia and other interested civil society organisations in the U.S. and EU. The project has been co-funded by the European Commission within the framework of its programme to promote transatlantic dialogues at the non-governmental level.

This report includes the series of research papers produced during the course of the project. The papers include summaries of European and U.S policies on climate change and energy; an analysis of the EU Emission Trading Scheme (ETS); a summary of the current state of U.S. policy on cap and trade; a summary of policy approaches to promoting biofuels on both sides of the Atlantic; and an analysis of EU and U.S. public perceptions of the environment and climate change.

The project culminated in a final conference held in Washington DC in April 2008. At this conference, participants agreed that greenhouse gas emissions from the transport sector should be addressed as a priority in overall climate policy through a broad mix of policy tools; while on the issue of biofuels, participants recommended a common strategy based on a combination of perspectives and called for a critical evaluation of the impact of biofuel production methods and outputs on the environment.

The report is available from: http://www.ieep.eu/publications/pdfs/tpa…

For further information on the T-PAGE project, please visit the project website: http://www.ieep.eu/projectminisites/t-pa…

Sirini Withana
Policy Analyst
Institute for European Environmental Policy (IEEP)
Quai au Foin, 55
1000 Brussels
Belgium

Direct tel: +32 (0)2 738 7479
Switchboard tel: +32 (0)2 738 7482
Fax: +32 (0)2 732 4004
email:swithana@ieep.eu

From:    cbsdpconsultant-climatechange at yahoo.c…
Subject: Fw: Now online: FMR31 Climate change and displacement issue
Date: September 28, 2008
The FMR journal on CC & displacement can now be downloaded below.

James S. Pender
Development & Natural Resource Management Advisor
(with Church of Bangladesh Social Development Programme)

Forced Migration Review issue on Climate change and displacement.

This 80-page issue of Forced Migration Review (FMR), published by the Refugee Studies Centre of Oxford University, includes a major focus on climate change and displacement and is now online at: http://www.fmreview.org/climatechange.ht… (We’ve just revamped our website - you may need to click ‘refresh’.)

***

In response to growing pressures on landscapes and livelihoods, people are moving, communities are adapting. This issue of FMR debates the numbers, the definitions and the modalities – and the tension between the need for research and the need to act. Thirty-eight articles by UN, academic, international and local actors explore the extent of the potential displacement crisis, community adaptation and coping strategies, and the search for solutions.

***

We would like to thank the following for their generous funding and support of this issue: UNEP, the Swiss Federal Department of Foreign Affairs, GTZ/the German Federal Ministry for Economic Co-operation and Development, UNOCHA and the International Centre for Migration, Health and Development.

This issue will be published in English, French, Spanish and Arabic. The English print edition will be mailed out to you in early October.

FMR would appreciate your help to maximise the impact of this issue. We would be grateful if you would forward this message to anyone you know who may be interested, add links on your website and/or list it in your updates and resources. Thank you.

Two other resources just launched which may be of interest to you are:
- Forced Migration Online Resource Summary on climate change and displacement, online at http://www.forcedmigration.org/browse/th…
- transcript of April 2008 ippr conference on climate change and displacement, online at http://www.ippr.org/migration

With best wishes

Marion Couldrey & Maurice Herson

– —- –
Marion Couldrey & Maurice Herson, Editors
Heidi El-Megrisi, Coordinator

Refugee Studies Centre, Department of International Development,
University of Oxford, 3 Mansfield Road, Oxford OX1 3TB, UK
 fmr at qeh.ox.ac.uk   href=”http://www.fmreview.org” title=”http://www.fmreview. ” target=”_blank”>www.fmreview.org Skype: fmreview
Tel: +44 1865 280700 Fax: +44 1865 270721

 From:    HIROAKI_TESHIMA at env.go.jp
Subject: [October 22, 2008, Paris, France] 2nd International Workshop on Sectoral GHG Emission Reduction Potential
Date: September 25, 2008

2nd International Workshop on Sectoral GHG Emission Reduction Potential.

On October 22, 2008, “2nd International Workshop on Sectoral GHG Emission Reduction Potential,” organized by the Government of Japan, will take place at OECD in Paris, France.

***

This international workshop aims to;
- Enhance understanding on bottom-up emission reduction potential analysis through comparison of various models.
- Find cost-effective abatement opportunities from global perspective.
- Discuss the role of bottom-up analysis in ensuring comparability of quantified emission reduction targets for developed countries.
- Discuss the role of cross-border analysis contributing to Measurable, Reportable and Verifiable mitigation actions by developing countries.
- Discuss the role of common actions taken by specific sectors in order to avoid adverse effect to the market (e.g. leakage).
- Find international benchmarks for major sectors, consistent with common but differentiated responsibilities and respected capabilities.
- Enhance synergy among policy makers, researchers and industry sector representatives.

<Tentative Agenda>

Session 1: Introduction to emission reduction potential analysis
- Latest research outcomes of emission reduction potential models.
- Regional difference of emission reductions potentials and cost-effective abatement opportunities.

Session 2: Bottom-up analysis for setting comparable quantified emission reduction targets for developed countries
- The role of bottom-up analysis in ensuring comparability of quantified emission reduction targets for developed countries.
- The way to achieve the global emission reduction objectives: maximizing the bottom-up global mitigation efforts.

Session 3: Cross-border analysis contributing to Measurable, Reportable and Verifiable actions by developing countries
- Latest information, data collection and indicators by industry associations (IISA, WBCSD, IAI, etc.) and international organization (IEA, APP, etc.)
- The role of sectoral reduction potential analysis in defining Measurable, Reportable and Verifiable actions by major developing countries, considering sustainable development, efficiency and effectiveness.
- Co-benefits and appropriate incentives in realizing the cost-effective mitigation potentials
- The role of common actions taken by specific sectors in order to avoid adverse effect to the market (e.g. leakage).

Session 4: Issue for future works
- Identification of elements for further research progress and cooperative sectoral activities
- Discussion on required actions in consideration of the negotiation of the future framework.

<Expected participants>

- Policy makers mainly from Annex I Parties
- Researchers on bottom-up model from Japan, Europe, U.S. and some developing countries.
- Industry sector representatives (e.g. Steel, Power, Cement, Aluminum and Transport)
- International Organization (e.g. OECD, IEA)

Hiroaki Teshima (Mr.)
Office of International Strategy on Climate Change
Ministry of the Environment, Japan
e-mail:  hiroaki_teshima at env.go.jp
Tel: +81-3-5521-8330
Fax: +81-3-5521-8276

Paulson cannot be allowed a blank cheque.
By George Soros, The Financial Times, September 24 2008 20:28.
Hank Paulson’s $700bn rescue package has run into difficulty on Capitol Hill. Rightly so: it was ill-conceived. Congress would be abdicating its responsibility if it gave the Treasury secretary a blank cheque. The bill submitted to Congress even had language in it that would exempt the secretary’s decisions from review by any court or administrative agency – the ultimate fulfillment of the Bush administration’s dream of a unitary executive.

Mr Paulson’s record does not inspire the confidence necessary to give him discretion over $700bn. His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85bn loan to AIG on punitive terms. The demise of Lehman disrupted the commercial paper market. A large money market fund “broke the buck” and investment banks that relied on the commercial paper market had difficulty financing their operations. By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s. Mr Paulson reversed again and proposed a systemic rescue.

***

Mr Paulson had got a blank cheque from Congress once before. That was to deal with Fannie Mae and Freddie Mac. His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available. Within a few weeks the market forced Mr Paulson’s hand and he had to take them over.

***

Economists’ Forum - Top economists critique US Treasury’s $700bn plan to bail out the banking sector and offer their solutions to the crisis:

Mr Paulson’s proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information. The securities are hard to value but the sellers know more about them than the buyer: in any auction process the Treasury would end up with the dregs. The proposal is also rife with latent conflict of interest issues. Unless the Treasury overpays for the securities, the scheme would not bring relief. But if the scheme is used to bail out insolvent banks, what will the taxpayers get in return?

Barack Obama has outlined four conditions that ought to be imposed:

- an upside for the taxpayers as well as a downside;

- a bipartisan board to oversee the process;

- help for the homeowners as well as the holders of the mortgages;

- and some limits on the compensation of those who benefit from taxpayers’ money. These are the right principles.

They could be applied more effectively by capitalising the institutions that are burdened by distressed securities directly rather than by relieving them of the distressed securities.

The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet.

$700bn in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble.

By contrast, the addition of $700bn on the demand side of an $11,000bn market may not be sufficient to arrest the decline of housing prices.

Something also needs to be done on the supply side. To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. The terms of mortgages need to be adjusted to the homeowners’ ability to pay.

The rescue package leaves this task undone. Making the necessary modifications is a delicate task rendered more difficult by the fact that many mortgages have been sliced up and repackaged in the form of collateralised debt obligations.

The holders of the various slices have conflicting interests. It would take too long to work out the conflicts to include a mortgage modification scheme in the rescue package.

The package can, however, prepare the ground by modifying bankruptcy law as it relates to principal residences.

Now that the crisis has been unleashed a large-scale rescue package is probably indispensable to bring it under control.

Rebuilding the depleted balance sheets of the banking system is the right way to go.

Not every bank deserves to be saved, but the experts at the Federal Reserve, with proper supervision, can be counted on to make the right judgments.

Managements that are reluctant to accept the consequences of past mistakes could be penalised by depriving them of the Fed’s credit facilities. Making government funds available should also encourage the private sector to participate in recapitalising the banking sector and bringing the financial crisis to a close.

The writer is chairman of Soros Fund Management