Central Banks act as Dark Knight again?

In the past few weeks many companies have depended on bailouts and others have had to file for bankruptcy as a result of the credit crisis. Companies such as AIG, Merril Lynch or Lehman Brothers are only a few examples of victims of the existing crisis that faced disastrous fates last week. As a result, the American Government proposed a bailout plan of $700 billion led by Mr. Paulson in an attempt to boost investor confidence. Initially, the market responded positively as the FTSE-100 and Dow Jones Index in New York both rose sharply after Democrat party leaders said a deal "is basically done". The bailout plan, which included buying back toxic assets such as subprime mortgages from banks, would have been a large step forward in curbing the current lack of liquidity in the market.

Unfortunately, talks for the $700 billion bailout plan for the US financial industry failed in the US Congress on the 25th of September as they ended in a "shouting match". Following several hours of discussions the plan was blocked by a group of republican members of the Congress and it has been decided that talks shall resume on the 26th of September. If the plan does not go through, more finance companies are expected to collapse, causing greater damage to the global economy as banks are too weary to lend to one another as well as to other companies due to the risk of counter-party failure. On the 26th of September, the US suffered its greatest banking failure to date when regulators moved in to close down Washington Mutual and sold it to JP Morgan Chase for $1.9bn.

As a direct result of failed talks over the bailout plan the Central Banks (Bank of England, US Federal Reserve, European Central Bank and the Swiss National Bank) stepped up co-ordinated efforts to inject longer term cash into money markets. The Bank of England announced that it would extend $30bn in cash for a week in exchange of eligible collateral, which intends to address funding pressures and ease the lending rates between banks. Furthermore it will make $10bn available for overnight borrowing and will inject longer term money into the sterling markets. Hopefully, this will increase investor confidence and stabilise markets until a longer term plan can be implemented.