In case you weren't paying attention yesterday, President Bush made an announcement yesterday from the Rose Garden, at what's being called a historic investment in the nation's banks. The Treasury Department will invest $250-billion of the $700-billion economic rescue plan in financial institutions. The full text of the announcement is available on The White House's website.
"This is an essential short-term measure to assure the viability of America's banking system," Bush said. "These measures are not designed to take over the free market but to preserve it."
Shortly afterwards, there was a joint statement released by the Treasury, Federal Reserve and the FDIC about the "voluntary" Capital Purchase Program. This program will be available to qualifying U.S. controlled banks, savings associations, and certain bank and saving and loan holding companies engaged only in financial activities that elect to participate before 5:00 p.m. (EDT) on November 14, 2008.
The full text of that announcement is available on the Federal Reserve's website.
The TARP Capital Purchase Program
Basically the Feds are using most of the $700-billion to inject capital into banks by purchasing equity shares. The minimum investment will be 1 percent of risk-weighted assets with the maximum up to $25 billion or 3 percent of risk-weighted assets, whichever is less. The Treasury will receive preferred shares that pay a 5 percent dividend, rising to 9 percent after five years with a minimum of a three year investment. After three years, the stock may be paid back at face value.
It will get warrants to purchase common shares, equivalent to 15 percent of its initial investment. Dividends will be payable quarterly in arrears on February 15, May 15, August 15, and November 15 of each year and dividends on other still can not be paid until dividends have been paid to the government. But the Treasury said it would not exercise its right to vote those common shares. For more explicit details, see a press released on the Treasury's website.
What is also in that part are restrictions on executive compensation of the top five executives at banks that receive the capital injections. These include a ban on the payment of golden parachutes, repayment of any bonus based on earnings that prove to be inaccurate, and a limit of $500,000 on the tax deductibility of salaries. You can read more about this on the Treasury's website in the above press release or on a Public Term Sheet (PDF), also available from the Treasury's website.
The FDIC will temporarily guarantee most new debt issued by insured banks as a part of the FDIC Act that it insures through June 30, 2009.
Third, the FDIC will immediately and temporarily expand government insurance to cover all non-interest bearing transaction accounts through December 31, 2009, also as a part of the FDIC Act. These accounts are primarily used by businesses to meet payroll and other continuing expenses.
And finally, the Federal Reserve will soon finalize work on a new program to serve as a buyer of last resort for commercial paper or the Commercial Paper Funding Facility (CPFF) program. Beginning October 27, the CPFF will fund purchases of commercial paper of 3 month maturity from high-quality issuers, who have investment-grade credit ratings.
"We are pleased to announce that nine major financial institutions have already agreed to participate in both the capital purchase program and the FDIC guarantee program. We appreciate that these healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the U.S. economy." - Joint Statement by Treasury, Federal Reserve, and FDIC Oct 14, 2008
THE NINE BANKS
A U.S. Treasury official declined to confirm the names of the nine banks that agreed to this program. The Wall Street Journal however, reported Monday the following banks and amounts:
- Bank of America (BAC), $25 billion
- Merrill Lynch & Co. Inc (MER), $25 billion
- JPMorgan Chase & Co. (JPM), $25 billion
- Citigroup Inc. (C), $25 billion
- Wells Fargo Corp (WFC), between $20 and $25 billion
- Goldman Sachs Group (GS), $10 billion
- Morgan Stanley (MS), $10 billion
- Bank of New York Mellon Corp. (BK), $3 billion
- State Street Corp. (STT), $2 billion
AND BUSH ISN'T DONE
According to a CNN Money article, Bush towards the end of yesterday, was mulling over whether to tap the second installment of its $700 billion authority to rescue the financial system as it looks set to burn quickly through the first $250 billion with its new bank recapitalization plan.
Treasury Secretary Paulson and other Bush administration officials were in discussions about whether they will need to access the next $100 billion, a Treasury official said Tuesday. Doing this would require "merely a transmittal letter from the president to Congress," the official said.
While the Treasury received $250 billion up front, the administration must notify Congress to access the next $100 billion. The final $350 billion, which also requires such notification, can be blocked by Congress.
President Bush sent a letter to House Speaker Nancy Pelosi, on Tuesday to certify that it's "necessary" for the Treasury secretary to use his authority to "purchase, or commit to purchase, troubled assets up to the limit of $350 billion outstanding at any one time."
House Financial Services Chairman Barney Frank said Congress might need to give the Treasury more money if its multi-pronged approach does not sufficiently quell the financial crisis. "If it's being well-used and more is needed, then yes," Frank said when asked if the Treasury Department coudl need more than $700 billion.
"IT WAS A TAKE IT OR TAKE IT OFFER" FOR THE NINE BANKS
What the above doesn't state about the nine major financial institutions is that they weren't given a choice by the Feds. The New York Times in an article dated October 14th states:
The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. on Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Paulson said they must sign it before they left.
The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard M. Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.
But by 6:20, all nine chief executives had signed...
What happened during those three and a half hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks - starting with theirs. [...]
"It was a take it or take it offer," said one person who was briefed on the meeting, speaking on a condition of anonymity because the discussions were private. "Everyone knew there was only one answer."
On Monday of this week the Down gained 936.42 points, more than 11 percent, its biggest one-day rally since 1933. The S&P advanced 104.13, 11.58 percent. It was the biggest percentage gain for the index since March 15, 1933, when it surged 16.6 percent. The Nasdaq rose 194.71, or 11.81 percent, its 10th biggest point gain.
On Tuesday of this week the Dow dropped 76.62, or 0.82 percent. S&P dropped 65.24 or 3.54 percent. Nasdaq dropped 65.24 or 3.54 percent.
Today, the foreign markets are dropping like flies again and as of this posting, the Dow has not opened.
Does this look normal or good to you?
Return as of October 15, 2008
Steven Pearlstein, who won a 2008 Pultzer Prize for Commentary, wrote yesterday in the Washington Post:
"Do not confuse this moment of calm with a stock market bottom or a sign that a serious recession has been avoided.
"We are in a bear market and will be for some time. That doesn't mea that you can't have good days or even long strings of good days -- what traders refer to as bear market rallies. But for a bear market to become a bull market, there needs to be some evidence that corporate profits have bottomed out and are about to take off again in response to a pickup from the economy -- and at this point we're a long way from that." [..]
"Put it another way, we didn't just have a housing bubble and a corporate takeover bubble and a consumer credit bubble and a commodities bubble. In time, those asset bubbles led to the creation of a bubble economy, with too many airplanes and restaurant seats and hotel rooms, too many office buildings and shopping centers, too many investment banks and media outlets dependent on advertising revenue from car companies producing too many cars and home builders producing too many houses. Shrinking all that back to the right size is what the coming recession is all about.
"Nobody really knows how long or how deep this recession will be. What we do know is that recessions that follow the collapse of asset bubbles tend to last longer than average -- and that this was the mother of all bubbles. So it's a fair assumption that this recession will last through 2009 and well into 2010. [..]
"This thing ain't going away any time soon."
WILL IT HELP?
Time will tell, I suppose however, there are still issues that have not been addressed.
It does not address he systemic problem underlying all of these problems. Unsustainable mortgages written on artificially high housing prices. Without household debt relief, this will do nothing except transfer money from Main Street to Wall Street.
It does not force the financial institutions to be financially responsible. This program takes huge risks in hopes that the banks can bail themselves out, if they can't, then the taxpayers lose. If they can, then the Federal Government wins.
It does not address that people borrowed more than they can repay, and when the foreclose, who is the winner and loser in all of this?
It does not provide the fiscal stimulus that is necessary to get the economy going again. Unemployment continues to rise. Foreclosure rates continue to rise. Inflation continues to rise.
It does not provide the change in corporate governance to prevent a repeat of the problems that caused this crisis.
It does not address the criminal behavior of some financial institutions.
It does not address any auditors on this deal.
Again, welcome to Socialism however, is it a lesser evil or a greater evil than letting the banks run free?
What American's keep screaming is why are they getting help? Why are they losing their jobs and their homes? It's become brutally obvious that our Government's priorities are focused solely on the financial institutions of this country, and nothing else, selling it under the guise that this will fix everything.
Which brings up the question. Which is the Government more responsible to? Fixing the banks and Wall Street, bailing them out, paying their bills, ensuring they continue on intact in hopes that this will 'fix' everything. Or helping the taxpayers to find jobs, so they don't lose their homes, to stop inflation, to help with medical bills, and to simply put food on the table.
Bankers, although the top five executives income will drop but no one else, and there are ways around that, will still have their jobs, their homes and food on the table. They will still have their limo rides, and helicopter rides to work. They will still have all their little corporate benefits. They will still have their vacation homes. They will still have their yachts, mansions, cocktail parties, art collections, etc. What will you have when this is all over?
I give it until the end of the year until it all comes crashing down, and that's the best case scenario.