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Taking the above into account, the new entity created by G 20 under the GFRI could have commitments in the amount of US 2 trillion or upwards to avoid any surprises down the road. The life of this entity could be at least 25 years to give it a strong chance of
success. The commitments or funding from G 20 countries could be in the form of government bonds issued directly to the entity created under the GFRI. The commitments will obviously vary from country to country (because of their GDP). The newly created entity may carry the same ratings as World Bank.

What would be a possible working structure?

Financial institutions falling under the 'eligible to apply' category could approach the entity created under the GFRI to replace its toxic assets with high quality assets under an asset-swap agreement. These financial assets could be in the form of guarantees or bonds or CDs issued by the new entity directly to the bank. To determine a fair value when replacing the toxic assets, the entity could take a median of the monthly rate of depreciation in the value of the recoverable toxic assets and it could agree to hold the toxic assets until maturity. The bank / financial institution will pay an annual fee to the entity for holding the toxic assets. This exercise would restore the confidence in bank's balance-sheet by sanitizing it from the toxic assets.

It will probably be a good idea to allow the entity to hold equity positions in the financial institutions on a case by case basis to bolster their capital.

Will the GFRI created entity be the looser in all this?

The entity (aggregator bank) created under GFRI would have all the expertise and resources to manage, restructure distressed assets and find value. Banks / Financial Institutions using the GFRI could pay an annual fee. Also with the methodology used for estimating the fair value for the recoverable toxic assets, there is a strong possibility that the entity will make money.

So how does this all benefit the G 20?

Most of the economies in G 20 are feeling the strain on their fiscal positions and it's getting worst every day. The budget deficits are getting bigger because of the stimulus packages along with other rescue packages (for banks, auto sectors, etc.) they are putting in place to fight the downturn in their respective economies. And in spite of the steps taken by various governments so far, the market has not reacted positively because it lacks confidence in the individual governments' ability to fix this global crisis.

The GFRI will send a strong signal and instill a lasting confidence in the market without which the markets around the world won't see sustainable rallies and economic growth. That's the Big Picture.

Concluded.

Sanjeev Kumar is Chief Executive Officer of Delamore & Owl Group of Companies (Website: www.delamoregroup.com), Toronto, Ontario, Canada. He holds dual Master's Degrees - one in Business Administration and another in International Finance. He has been the recipient of the "Southeast Asia Young Achiever's Award" for Year 2002.
Article posted on March 14, 2009.