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US politicians under pressure to resolve current turmoil

US House members are under enormous pressure to resolve the current impasse, according to Julius Baer.

The firm’s head of research and equity strategy, Christian Gattiker, says that this has been exacerbated by the absence of a “plan B”and the financial markets’ condemnation of Monday’s vote. There is the potential to vote on a new bill by the end of the week.

Following the US House of Representative’s rejection of the bill that would have framed Treasury Secretary Paulson’s financial rescue plan, Gattiker says that a simple re-vote on the existing bill seems unlikely. Instead, a modified bill that allows for dissenting Republicans to gain political capital in the face of their own uncertain re-election prospects looks more probable.

After the vote, there was much partisan finger-pointing, as a well as Secretary Paulson calling for a return to the negotiating table to hammer out a new deal. Neither Democrats nor Republicans ruled out discussions that would lead to a new bill.

Gattiker says that it will remain imperative for the Democrats that they secure bipartisan support for the financial rescue plan, as they want to avoid taking on sole political ownership of such monumental legislation.

The negative surprise in the latest political process exacerbates the current distress in the financial space, Gattiker claims. This is best illustrated by the Ted spread index, which shows risk premiums required for short-term cash lending among banks. After the vote, it rocketed indicating further distress as forced sellers are likely to reduce positions into an illiquid market.

This is not the time to make major portfolio shifts. Highly leveraged players will have to sell into illiquid markets, creating both volatility and downside pressure. Investors should focus on quality, liquidity, funding and support. Capital preservation remains the ultimate goal in these markets, he adds.

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