Investors doubt Paulson recovery plan

US markets fell yesterday after an initial rebound, a move echoed by the New Zealand Stock Exchange this morning, with the Australian market likely to follow suit.

US markets opened strongly yesterday and Australian shares rallied more than 4 per cent, with banks gaining on the optimism that regulators and central banks may be able to stabilise global financial markets.

But while markets were initially buoyed by US Treasury Secretary Henry Paulson’s request for US$700 billion to buy up soured mortgage investments, Shaw Stockbroking said this “initial relief” later gave way to “scepticism and uncertainty”.

“One of the main concerns was that the plan wouldn’t prevent the broader economy from slipping into a recession,” the broking house said.

When read closely, Paulson’s statements over recent days are more likely to create fear than certainty. His comments reveal the depth and severity of the situation, but fail to provide real detail around the response.

Investors are now absorbing Paulson’s comments regarding the disruption to investment and job creation, the fact that US home prices continue to fall, personal savings are at risk and the strength of financial institutions has been undermined.

Paulson has also criticised the regulation of the US market, saying “this crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated”.

The Dow fell 3.27 per cent, the S&P 500 was down 3.82 per cent while the NASDAQ dropped 4.17 per cent.

The financial sector in particular was heavily sold, with groups such as Merrill Lynch, Bank of America, Citigroup and JPMorgan suffering.

European shares also fell back, with the benchmark FTSE 100 closing 1.41 per cent lower. Banks again led the retreat, with Barclays, HSBC and Deutsche Bank posting losses.

It’s expected the Australian share market will follow suit at the opening of trading this morning.

Australian Federal Treasurer Wayne Swan said the US Government’s proposed package is “enormous”, amounting to more than “US$2,000 for every man, woman and child in the US”.

Swan said the size of the proposed package “brings into sharp focus the size of the problems facing the financial system in the US”.

But he once again drew a distinction between the US banking system and the Australian banking system, which is “not infected with this type of bad debt that has necessitated the US bailout”.