Treasury Throws Good Money After Bad
$250 billion injection for banks misunderstands nature of the problem.
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
JPMorgan (JPM): $25 billion
Wells Fargo (WFC): $20 - 25 billion
Goldman Sachs (GS): $10 billion
Morgan Stanley (MS): $10 billion
State Street Bank (SST): $3 billion
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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