Monday, October 27, 2008

One possible reason...

'Crisis unfolding' summed some of the criticisms leveled against the way the Treasury Department is structuring the first USD 125 billion it was providing to nine national banks... News reports have indicated that "... Nine of the largest U.S. banks were essentially arm-twisted last week into signing on for the first $125 billion in capital infusions ..." so apparently some of these banks did not want to participate and were muscled into doing so.

First, does it make sense that all of these banks need bailout money? After all, JP Morgan Chase acquired Bear Stearns and WaMu when those two companies failed, while Bank of America purchased Merrill Lynch. All of these transactions occurred with government approval and assistance (see 'Redefining "too big to fail"'). If JP Morgan Chase and Bank of America both were in jeopardy themselves then why would this have been allowed? Answer, presumably they were not in real jeopardy... and do not need their TARP assistance!

So, why did the Treasury twist their arms to accept these 'investments' of capital? The only plausible reason could be so as not to signal to the market which of the big national banks were vulnerable and which were not (because, presumably, savvy folk would immediately shift their money from the 'weak' to the 'strong', and thus the 'bailout' would bring about precisely the effect it was trying to avoid!). OK, this being the case, the Treasury obviously could not put too onerous a set of conditions on the capital infusion (otherwise no amount of arm twisting would have succeeded in getting them all to participate!).

The second USD 125 billion tranche will be going to approximately 20 regional banks. Here the Treasury initially was going to announce which of the regional banks would be 'applying' for help. However this was put on hold for the same reason (i.e. fear of signaling the 'weak' and the 'strong') and a decision was made to let the banks make the announcements themselves.

Much concern exists re what criteria the Treasury will use to determine which banks will be helped and which will not... Already the Treasury refused to help National City (Cleveland, OH), which then had to sell itself to PNC for USD 5.58 billion (Note: PNC itself is the recipient of USD 7.7 billion from the TARP, so PNC appears to be using the TARP money for the acquisition vs. the stated reason for the TARP i.e. to unblock the credit freeze and promote lending...)

And now the latest is that apparently insurance companies are also going to be included in the MOAB... At this rate it does not appear that the original USD 700 billion will be enough...