Stimulus Or Mere Hindrance?

U.S. Government have unveiled the much anticipated financial sector rescue plan. The Treasury Department and Federal Reserve took the bold step of committing more than US$1trillion in financing for loan purchases as well as commercial mortgage-backed securities, and unveiled a sweeping reform to previous programs.

Here are some of the salient points:
• The banking sector will undergo a check up to determine whether banks have adequate
capital to continue lending. Financial institutions will also be tested to see if they can stay
solvent if the downturn turns worse than expected;

• Efforts will be made to improve banks' public disclosure of their holdings. Besides, banks with assets greater than US$100billion will have to undergo individual assessments;

• Similar to the existing US$250bn Capital Purchase Program (CPP) under the Troubled
Asset Relief Program, Treasury will continue to help banks shore up capital after
undergoing a stress test. Like the TARP program, Treasury will take an equity position in
the form of preferred shares in banks receiving CAP investments. The investments that
Treasury makes will then be placed into a separate trust, overseen by fund managers;

• A public-private investment fund will be setup to help banks cleanse their holdings of "toxic" assets in order to extend private lending. However, no specific amount was provided;

• banks receiving government funding are required to show how they are using the money they receive for lending. They must also submit a plan to Treasury detailing how they expect to use bailout money to boost lending;

• Companies in receipt of bailout funding will be required to cut their dividend to a maximum
of 1% per quarter until the loan is repaid. Banks cannot repurchase privately held
shares, and they cannot buy other healthy banks without Treasury's consent;

• Executive pay at some bailed-out banks is to be capped;

• A foreclosure prevention program valued at US$50bn will be introduced to mitigate foreclosures and make housing more affordable by lowering interest rates;

• A new program to boost small business and community bank lending will be introduced, by financing purchases of high-quality Small Business Administration (SBA) loans and increasing
SBA loan guarantees to 90% and reducing their fees.

Many investors have started to question if the latest stimulus plan is enough to halt the economic slump, particularly after billions of dollars pumped in but have yet to witness any form of positive results.

What's your thought?

Source of rescue plan : CNN Money