Interbank Forex and the US Bailout

In a move reminiscent of J.P. Morgan's attempt to salvage Wall Street in 1929, billionaire investor Warren Buffett invested five billion dollars in Goldman Sachs Group Inc. Berkshire Hathaway Inc., owned by Buffet announced it was purchasing five billion in preferred stock and indicated a future purchase of five billion in common stock. Stocks stabilized following Buffett's investment but credit markets are still awaiting more news about the US government's plan to bailout banks.

Goldman Sachs also announced it will offer five billion in common stock to the public. Goldman Sachs and Morgan Stanley were granted approval to become bank holding companies and it is hoped that this will allow them to strengthen their balance sheets.

Although Buffett's move calmed skittish investors, the financial world is awaiting today's appearance of Treasury Secretary Paulson, former CEO of Goldman Sachs, and Federal Reserve Chairman Ben Bernanke. Although there is significant opposition to the bailout from Democrats and conservative Republicans it is hoped that the bailout will proceed quickly.

All these events have created uncertainty in the Interbank Forex markets despite the efforts of several central banks around the world. The Federal Reserve acting with Australia and Scandinavia moved to provide liquidity while Europe, Britain, Japan and Australia pumped billions of dollars into their respective banking systems. Once a bastion of liquidity, the short term lending markets where banks lend to each other has come to a grinding halt due to concerns of the creditworthiness of borrowers.

The dollar continues to struggle on Interbank Forex markets due to uncertainty about the financial position of the US and the perceived political opposition to the bailout of financial institutions by the government. The dollar has fallen against the Euro but is rising against the Japanese Yen.

Because of uncertainties about the bailout and the political disagreements world financial markets reacted. US stock prices fell 1% and losses were reported in Asian and European markets. Banking woes extended into China where shares of Ping An Insurance fell 9.7%. Financial advisors have been besieged with questions and concerns from investors. Said Cleveland Plain Dealer columnist Teresa Dixon Murray, "There's a feeling of helplessness that nobody seems to have the answers."

Obviously the interbank Forex markets will remain in limbo until an agreement is reached in the US congress. With banks hoarding cash and rising lending rates, Interbank Forex trading conditions will remain difficult. One can only hope that the US congress and the Bush administration can reach a swift accord.

Until the terms and conditions of the US bailout become clear, markets, including the Interbank Forex, are facing uncertain conditions. Investors around the world are hoping for a quick and solid solution to the volatility of this weeks markets.