Treasury Throws Good Money After Bad
In recent testimony before the Senate Banking Committee, Treasury Secretary Hank Paulson rejected the idea of the US government injecting capital into banks and taking preferred stock, suggesting that such an extreme measure would imply that the US banking system had failed.
"Some [say] we should just stick capital in the banks, take preferred stock in the banks. That's what you do when you have failure," Paulson said.
Houston, we have failure: Yesterday, after the markets closed, Paulson announced plans to just stick capital -- $250 billion, to be exact -- into the banks and take preferred stock.
According to the Wall Street Journal, 9 of our biggest banks will receive around half the total injection.
- Citigroup (C): $25 billion
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JPMorgan (JPM): $25 billion
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Wells Fargo (WFC): $20 - 25 billion
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Goldman Sachs (GS): $10 billion
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Morgan Stanley (MS): $10 billion
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State Street Bank (SST): $3 billion
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Bank of New York Mellon (BK): $3 billion
The rest of the $250 billion will be divvied up among smaller, healthier institutions around the country.
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Reports indicate that some of the banks balked at the injections, which include restrictions on executive pay and requirements to help struggling homeowners.
Careful not to dilute existing shareholders by buying common equity, Treasury will purchase preferred stock carrying a 5% dividend, that jumps to 9% after five years. This represents a significant discount, however, to the 10% return Mitsubishi Finance (MTU) is earning on its recent $9 billion investment in Morgan Stanley, and Warren Buffett is picking up from his stake in Goldman Sachs.
In conjunction with Treasury's plan, the FDIC announced it will guarantee senior unsecured debt issued by banks, making it easier for them to raise capital in private markets. The FDIC will also insure all non-interest bearing deposits, which are typically held by businesses.
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Agreed.
They should have let the market fall.
Locked doors and empty accounts would be a physical manifestation of the reality; too much debt not enough income.
Instead, they are delaying the inevitable.
"We have to do something" was a reason for destroying the stores of Jews in Germany, making them wear stars, and building an army.
It was also the reason for the communist revolutions; class and racial or religious warfare.
We have the ingredients here, and we are lacking individual accountability and consequences for choices for individuals and institutions.
You can't cure a debt crisis with debt anymore than you cure racism with racism or treachery with treachery.
Hopefully it is not our kids shooting the parents and grandparents who put us in this place.
No question that the debt metrics have gotten to absurd levels.
However, within the realm of possibility is that sufficient liquidity is needed to float some boats until a portion of the debt can be devalued sufficiently via inflation. Gradual is usually the preferred path to the destination...
