Politics were behind the failure of the Paulson plan to pass the US Congress lower house.
INVESTORS who panicked after the US House of Representatives narrowly defeated the US Government's bail-out package confused the politics of the bail-out with reality.
Those who did not panic were collecting shares from the sellers yesterday morning, which is why the market rallied during the day, albeit with less conviction as the crucial baton-pass to the Northern Hemisphere approached.
The bail-out is still likely to happen, indeed is more likely to happen after yesterday's histrionics.
It can't repair the system. The wave of bank failures, shotgun marriages and government nationalisations that last night extended to another Benelux bank, Dexia, is more important in that respect; and, when that is over, the rules of the global financial game will be tightened and simplified.
And of course this is the culmination of a market crisis that is yet to feed fully into the real economy. It has become so traumatic now that the collateral damage will be significant, and that is one reason the Australian miners have been sold down heavily.
They could bounce if fear recedes, but the five-year long commodity price boom is over for the time being, and global economic indicators are now almost uniformly gloomy: solid August retail trade figures for Australia released yesterday were an exception that has probably already been reversed as the crisis undermines consumer confidence.
The US support package nevertheless still has a chance of doing what it is supposed to do: provide a direct liquidity and lending catalyst to a banking system that is frozen like a rabbit in the spotlight, and head off more mark-to-market losses and capital shortfalls inside the more vulnerable banks.
Banks that sell impaired debt into the new facility will in many cases be booking a profit, because the purchase price will be above the fear-laden and unrealistic values mark-to-market accounting has created.
That does not mean the mark-to-market prices should prevail, however. In this environment, they are part of the disease, not part of the cure — the doppelganger of the ridiculously high prices the same debt attracted during the boom, and equally illogical. Using them to frame a debt swap would lock in the error.
The bail-out is still likely to happen because it is crucial, and because the "no" vote in Congress was transparently political.
American voters will choose a new US president in five weeks' time, on Tuesday November 4, but that day there is a general election too, for every member of the lower house, 435 in all, a third of the 100-strong Senate, and 11 state governors.
That has shaped the way the rescue package has travelled through Congress: it is unpopular with voters — at least a third are opposed — and US politicians are asking themselves if they won't end up campaigning against someone who has not supported the plan — someone who can argue that he or she has defended taxpayers against a $US700 billion ($A840 billion) "don't argue" raid by the US Treasury.
The Democrats are actually in a position to pass the package on their own. They have a clear majority in the lower house, and a slim one in the Senate. But they are understandably unwilling to shoulder that burden — because it would create problems in individual races, and because the Republicans and the Bush Administration were the architects of the crisis, or, at least, witless onlookers as it incubated.
Political pundit and former Clinton White House adviser George Stephanopoulos calculates there are 31 lower house seats that may change occupants on November 4, held almost evenly by Democrats and Republicans. Two dozen of those 31 House members voted against the package, pushing the no vote over the line: the final vote was 205 in favour, 228 against, with the no vote comprising 133 Republicans and 95 Democrats.
Now that the package has been turned down once, the dynamic changes again, however. Those who voted against have credentialed themselves as gate-keepers of taxpayer funds, and have either neutralised their election opponents, or created an edge. The odds on the bill passing when it is resubmitted, probably on Thursday night, are correspondingly higher.
And despite yesterday's savage sell-off, the market has not been carried into uncharted territory. Debt spreads in the wholesale market are now as wide as they have been in the crisis, but not wider. Overnight currency swap rates jumped yesterday, but remained below levels reached in mid-September, when the latest phase of the crisis erupted after the collapse of Lehman Bros.
Here, the big banks were hammered but remained above mid-September lows. NAB, which could either win brownie points for being conservative or be savaged today after waiting for the market to close before announcing new conduit loan write-downs of $100 million and a five-year, $300 million insurance program against more of them, closed at $24.26 against a September 18 low of $18.60, for example. ANZ closed at $18.75, comfortably above its September 18 low of $15.07.
The world's central banks are maintaining the crisis status quo, by pumping huge amounts of cash in as needed. But the status quo is still that the system is frozen: banks are no longer exchanging funds, and the assistance package is still the only plan on the table to get things moving again.
The Maiden family owns NAB shares.
