US set for ‘big bang’ financial clean-up

Krishna Guha
Financial Times
Saturday, Jan 31, 2009

The Obama administration is gearing up for a “big bang” announcement next week that will combine a bank clean-up with measures to reduce home foreclosures and probably steps to kick-start credit markets.

The plan will involve an overhaul of the troubled asset relief programme – the $700bn bail-out fund – including strict curbs on compensation at banks receiving public aid. The Tarp overhaul is intended to restore public confidence in what is a deeply unpopular programme and ensure that taxpayer money is not used to fund excessive pay, bonuses and dividends to shareholders.

“There will definitely be a cap of some sort on bonuses,” said a Wall Street executive who has taken part in talks with the authorities. “The political climate is such that there is a need to punish Wall Street.”

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The announcement will follow Friday’s news that the US economy contracted at an annualised rate of 3.8 per cent in last year’s final quarter – less than analysts were expecting, but still the worst quarter since 1982. The fall was cushioned by ballooning inventories, which suggest the economy could shrink faster than expected in the first quarter.

The “big bang” approach reflects the belief of Tim Geithner, Treasury secretary, and Lawrence Summers, National Economic Council director, that the Bush administration was wrong to dribble out policy initiatives. Mr Geithner intends to present a “comprehensive” plan that policymakers hope will command market confidence.

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