Government Needs $4 Trillion for Bank Bailouts

by cassy82 | February 5, 2009 at 07:19 am

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There is a big possibility that the price of bailout for banks will be greater compared to the allotted $700 billion because banks do not have enough resources to mend their problems. Therefore support for companies in financial services spent by the government can eventually go up to the trillions. This is bad news also for those experiencing the foreclosure crisis.

The half portion of the $700 billion to assist banks has been used in obtaining preferred portions of banks in jeopardy because of the foreclosure crisis. A portion of the remaining $350 billion can be utilized to buy bad assets from the bank’s books and keep them in what is termed as the “aggregator bank”.

Therefore, the total working capital needed by the government would more or less be $4 trillion, according to Simon Johnson of the Peterson Institute for International Economics. The government should give more sets of funds to banks since they are too vulnerable in terms of losses. It is also necessary to get do away with several toxic assets which put a burden on financial bodies before giving them a chance to recuperate.

It is estimated that the remaining cost for taxpayers for an expanded bailout can be between 5 percent and 10 percent of the GDP, or about $1 trillion to $2 trillion.

But pleas for a clear statement from the U.S. government have amplified in the past few weeks due to the free falling of bank reserves and the rising foreclosure problem. The index of KBW Bank has plummeted 35 percent in January following a 50 percent drop last year, as investors are anxious that coercing the government on nationalizing several banks and in the process, eliminate shareholders, might actually happen. Both the shares of top banks like Citigroup and Bank of America have been mostly hit, which further intensifies the foreclosure problem.

The government will not allow vital institutions go down as the former can obtain bank warrants acquiring help that could equate towards common shares the moment the government advertises these. Furthermore, the government can employ private equity supervisors to manage the properties the government obtains and eventually sell these when the right time comes.

The plans mentioned should permit the Treasury Department to obtain some benefits for taxpayers as soon as the economic downfall comes to an end after which, the banking industry and foreclosure crisis begin to improve.

By Cassiano Travareli