The government will take a stake via preferred stock in a list of 9 banks:
As part of its new plan, the government is set to buy preferred equity stakes in nine top financial institutions, according to people familiar with the situation. It’s unclear how much would be invested in each institution. The move is designed to remove any stigma that might come with a government investment.
Not all of the banks involved are happy with the move, but agreed under pressure from the government.
If there are pay and golden parachute restrictions in taking this preferred, I bet there were some very unhappy people in the room. I’m sure the Hammer had to do some cajoling and appealing to patriotism, but I’m glad this got done the way it did. I was writing an article today (which I’ll now have to edit heavily if not scrap) advocating that the government take stakes in the good banks rather than the bad ones as the UK did (HBOS and RBS). The Treasuy is basically acting as investment advisor to the American people and it makes a lot more sense to invest in the well run insitutions than the ones that were run into the ground.
At least some of the rally today was anticipation of some kind of deal like this and the futures are pointing higher for tomorrow morning, but at what point will the panic buyers of today remember we are still on the verge of recession? Injecting capital into the banking system is certainly a step in the right direction, but there are still a lot of unknowns out here. We’ve got an election in a few weeks and the odds look to favor Obama right now. Will he raise capital gains taxes? Will he raise marginal tax rates? Will he renegotiate NAFTA? My guesses would be yes, yes and probably not, but who knows? What else will he want to do? There is nothing more dangerous than a politician with something to prove….
We are probably still headed for a recession and this will likely not change that. Business basically came to a standstill the last few weeks so the economic statistics will probably look pretty bad in the immediate future. House prices are still falling. Unemployment is still rising. I suppose with more capital, the banks can lend more, but is that really what our economy needs right now? The cure for an economy with too much debt cannot be more debt. We need to rebuild our savings and that can only happen if spending is dialed back. And from what I hear, people are doing that in spades. Frugal, as Mike Shedlock says, is the new reality.
I find it hard to be happy that the government will own a big chunk of the financial sector. Very little good has ever come out of the union of politicians and big business. If memory serves, that is, at least partially, what got us into this mess (think Fannie and Freddie).
Update: The amounts for each firm (via Calculated Risk):
Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.
… The government will purchase perpectual preferred shares in all the largest U.S. banking companies. The shares will notbe dilutive to current shareholders, a concern to banking chie executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.
As I said earlier, the Hammer didn’t give them much choice (from the NYT):
Treasury Secretary Henry M. Paulson Jr. outlined the plan to nine of the nation’s leading bankers at an afternoon meeting, officials said. He essentially told the participants that they would have to accept government investment for the good of the American financial system.
Take one for the team boys….