Welfare for strong banks?

[David Farber <dave () farber net>]

Begin forwarded message:

From: John Levine <johnl () iecc com>
Date: October 16, 2008 9:42:37 PM EDT
To: dave () farber net
Cc: "Ronald J Riley \(RJR-com\)" <rjr () rjriley com>
Subject: Re: [IP] Welfare for strong banks?

> I noticed a NY Times graphic that showed CitiGroup, Bank of America
> and Wells Fargo as receiving $25 billion each in welfare money. OK,
> I'm no expert. Maybe someone who is an expert can clue us in as to
> why these reportedly healthy banks need these hefty infusions. Or,
> was "the system" gaming us again, pretending these institutions were
> sound when in fact they weren't.

You shoulda read the article that went with the graphic, or any of the
other ones on the nine banks.  Banks all over the country (and the
rest of the world) aren't making business loans, because the huge
writedowns on derivative junk have left them without enough capital to
do so.  This is a force-fed temporary injection of more capital.
Partly the Treasury did it to all nine of them to get them all to
start lending, partly because in this jittery market if they only did
it to some of them, the ones left out would be perceived by other
banks as having been too weak to be worth propping up regardless of
their actual health.

The "welfare money" is buying preferred stock on which the government
gets a 5% annual dividend increasing to 9% after five years.  That's a
pretty rich dividend, the idea being that as soon as they can raise
capital privately, they'll buy the government out and stop paying the
dividend.  As likely as not, when this episode is over, the government
will end up making money on it.

http://www.nytimes.com/2008/10/15/business/economy/15bailout.html

R's,
John




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