Tuesday, October 21, 2008

Crisis unfolding...

The MOAB ("mother of all bailouts") proceeds apace. Treasury Secretary Paulson has dipped into his $700 billion piggy bank and is injecting capital directly into a number of banks - USD 125 billion to nine major banks. He is being criticized for being too "kind" and making this almost a 'no strings attached' infusion, since in return the government gets non-voting, non-convertible, callable, preferred shares that have a poor dividend rate. The criticisms include:
  • The government gets no seats on these institution's boards (as opposed, for example, to others who have similarly invested in some of these banks e.g. Mitsubishi UFJ, a major Japanese bank, that will be investing USD 9 billion in Goldman Sachs...)
  • These preferred shares are non-convertible i.e. can not be converted into common shares
  • They are also callable in three years, at terms favorable to the banks...
  • They pay an interest rate of only 5% (Warren Buffet got a rate of 10% for his similar investment)
  • The plan does not require that the banks suspend dividend payouts (presumably if the banks are in a weak credit situation it doesn't make sense for them to payout to shareholders...)
Additionally, it is not clear that the banks will resume lending (i.e. unblock the credit freeze) even when they get these funds, versus simply shoring up their balance sheets. And, as the underlying assets continue to loose value (since housing prices are still going down in many markets!) it seems to this blogger that this "help" is temporary in nature (and thus might have to be reprised further down the road!).

Meanwhile, hasn't the Federal Reserve already been extending funds to banks and other entities at a prodigious rate (see graph below)? Per Economist's View "... Before the crisis began, the Fed had $868 billion of assets, 91 percent of them in innocuous Treasury bills and bonds. Now it has $1.6 trillion in assets, with less than 30 percent of them in Treasuries; the remaining assets are mostly in the form of loans to banks, securities firms, AIG, foreign central banks, commercial-paper programs and so on ..." Oh well, they have another USD 575 billion to "play" with!

Churchill’s Dictum
Banks Are Likely to Hold Tight to Bailout Money
The Guys From ‘Government Sachs’
This Bailout Doesn’t Pay Dividends
Bernanke is fighting the last war

Previous 32 related blog entries collected at 'All together now.'

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