Evercore Pan Asset

Last Friday we drew attention to the lack of detail in the US recovery plan. This week markets are having second thoughts. The Democrats are saying they want some money to go to those unable to pay their mortgage interest, as well as large sums going to Wall Street banks that have made mistakes. They understandably do not want taxpayers money to end up rewarding shareholders or senior executives in banks that sell the government their toxic debt. Some Republicans are saying they are unhappy about any idea of a subsidy or bail out. They too want more control over how the money is spent and how it is used by the banks.

Wall Street has joined in the negotiations, sending shares crashing down by 3% on Monday to remind the legislators that in their view the money is needed, and needed quickly. For once the Street is on Bush’s side.

It is going to be difficult settling valuations for markets until we know the details of the final package. There is still no news on how wide a range of debts will be considered by the Treasury. We do not know how they will price the damaged instruments and how many institutions will be eligible to sell to the taxpayer. World markets await news, as these issues will be crucial to future valuations of all kinds of financial assets. Set the prices too low and there will be further write offs and capital destruction in the banks. Set the prices too high and the US taxpayer stands in danger of big losses, and will not have enough cash to take enough of the debts.

Short selling of financial shares is now temporarily banned on both sides of the Atlantic. Yesterday showed that markets can still fall a lot without short sellers in the most damaged sector. There is no easy or quick regulatory fix to sort this problem out.

Meanwhile people are dumping dollars, worried by the ballooning US government deficit to pay for all these interventions, and worried by the number of new dollars being created and issued to world banks to try to make markets more liquid. Cash remains an attractive haven whilst these big matters are fought over on the Hill and in the markets. So far the main attention is on the financial world and the struggle of several big banks to survive. As the winter develops more attention will spread to how governments pay for the downturn which will damage their own accounts badly. It will also turn to the downturn in the real economy, as trouble on Wall Street passes to trouble on Main Street.

This week in the UK commentators are waking up to the big deficits the UK government is already running and the likelihood of big increases to come. It is not a good background for investors.