Tuesday, October 14, 2008

Details on the banking equity injection

Bloomberg provides details on the Treasury's investment in U.S. banks:
The Bush administration will invest about $125 billion in nine of the biggest U.S. banks...

The proposed cash injections in exchange for preferred shares are part of a $700 billion rescue approved by Congress and follow similar moves by European leaders to unfreeze credit markets by helping beleaguered banks. ...

The purchases represent a new approach for Treasury Secretary Henry Paulson, who first promoted a bailout targeted at illiquid mortgage-related assets. The urgency for a more immediate infusion has grown as banks struggle to regain the confidence of investors, counterparties and clients after bad loans caused more than $635 billion of writedowns across the industry. Paulson will discuss his plan at a press conference at 8:30 a.m. today in Washington. ...

The Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan, people said. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Wells Fargo is to get at least $20 billion, Goldman and Morgan Stanley will each get $10 billion, and State Street and Bank of New York will get about $3 billion each, people said.

The government will obtain its stakes with a type of security designed not to dilute the value of common shares.

None of the nine banks getting government money was given a choice about it, said people familiar with the plans. All of the banks involved will have to submit to compensation restrictions as mandated by Congress, people said.
I find the second to last sentence disturbing. Is America still a free country? Government has made a big grab for power under President Bush, starting with the Patriot Act. Now the government is forcing banks to sell parts of themselves. I wouldn't be as bothered if banks were voluntarily letting the government invest. But force? Does JPMorgan even need the money?

More details from The New York Times:
The preferred stock that each bank will have to issue will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years. The government will also receive warrants worth 15 percent of the face value of the preferred stock. For instance, if the government makes a $10 billion investment, then the government will receive $1.5 billion in warrants. If the stock goes up, taxpayers will share the benefits. If the stock goes down, the warrants will be worthless.
By comparison, the U.S. inflation rate over the past year has been 5.4%.


  1. James,

    I hope you are misunderstanding the sentence that banks will have no choice. I read that as that the banks will not have a choice about the method of the injections (preferred stock vs. direct injection), and the compensation limits.

    If the banks already have sufficient capital, I believe they can opt out.

    By the fact that they are already on the list, I assume they have already made arrangements with the USG.


  2. i'd like to hear Schumer explain this to his pals in the banking lobby.

    overplay your hand, anyone?

    now all their bonuses belong to the baby boomers.