Today I read several articles in MSN that really set me off. It stated "Ten days after passage of its $700 billion bailout of the financial sector, the U.S. Treasury has announced that it will implement this program, in part, by giving banks $250 billion in return for shares of their stock."
The shares of stock portion was not part of the original approval package by the US Congress. In other words, the U.S. government will acquire a significant ownership stake in the banking sector. Oh yes, the shares of stock they are talking about are Preferred Shares of stocks that pay a 5% dividend and they carry warrants to purchase common shares in the bank as well. Preferred shares get paid off before the common shareholder like most of the population owns. Oh yes, distributions of dividends for the preferred stock are paid prior to the distribution of dividends to the common share holder.
They politicians say this is not government privatization of the banking system. Maybe not but it is certainly a major step in that direction.
"The goal of this stock purchase is to "inject liquidity." This will, in principle, improve bank solvency and increase bank lending, thereby minimizing the chance of a recession. This approach appears to be favored by the Treasury over the previously announced strategy of buying "troubled assets" from banks." Note the words "in principal" Having been a small business lender in banking for over forty years I can tell you with confidence that a large bank can set aside $ 25MM for loan loss reserves in about five minutes. That means that the solvency of the bank has improved but there is no new money to increase bank lending! The banks can use the new capital in any manner this wish that means they do not have to make any new loans with it.
In addition to the new $ 250 billion for the purchase of the preferred stocks shares the Treasury is planning to guaranty is the debt owed between banks.
"The government may guarantee nearly $2 trillion in U.S. banks' debt and deposit accounts for more than three years in an effort to break the crippling logjam in bank-to-bank lending."
That's the equivalent of about 20 percent of the national debt, which recently blew past $10 trillion, and roughly 14 percent of U.S. gross domestic product — the economy's total output of goods and services.
By the way the $ 10 trillion they state is the national debt does not include another $ 46 trillion in off balance sheet expenses for social security, medicare and military benefits. They somehow never mention the additional $ 46 trillion that you and I as taxpayers must pay for.
The FDIC is also involved in the current turmoil. "Well over half of the roughly 8,500 U.S. banks and savings and loans are expected to tap the FDIC's guarantees. The agency will provide temporary insurance for loans between banks, guaranteeing the debt in the event the issuing bank failed or its holding company filed for bankruptcy. The banks will be charged a special premium for the guarantees. "The FDIC is taking this unprecedented action because we have faith in our economy, our country and our banking system," FDIC Chairman Sheila Bair said in a statement. "The overwhelming majority of banks are strong, safe and sound. The FDIC will guarantee new senior unsecured debt that banks issue to each other between Oct. 14 and
June 30, 2009. It would be insured by the FDIC through June 30, 2012. Senior unsecured debt does not have collateral underlying it but must be repaid before other classes of debt".
Amazing that the FDIC will get their unsecured debt paid "BEFORE" other classes of debt. Every unsecured creditor in bankruptcy or liquidation is always the last to get paid.
"A lack of confidence is driving the current turmoil, and it is this lack of confidence that these guarantees are designed to address." Well I guess we can have faith in the economy until June 30,2012.
"Some of the nation's largest banks had to be pressured to participate by Treasury Secretary Henry Paulson, who wanted healthy institutions that did not necessarily need capital from the government to go first as a way of removing any stigma that might be associated with banks getting bailouts."
Wells Fargo Bank is planning a new $ 20 billion common stock sale. They plan to purchase the preferred shares back with common stock sales proceeds.
Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp. are all supposed to receive $ 25 billion for their preferred stock.
As recently as last week Bank of America could not even sell their own common stock for $ 23.00 per share then dropped to $ 22.00 per share and still could not sell it. They could not sell it because no one can determine how much ion losses they will absorb from the Merrill Lynch purchase. Citigroup did not have enough capital to purchase the Wachovia Bank. Wells Fargo and JP Morgan Chase will have to participate in the preferred stock issuance.
In summary the banks have to sell $ 250 billion in preferred stock to the US Treasury, they will guaranty approximately $ 1.4 trillion in bank to bank loans and the Treasury will purchase
$ 700 billion in bad loans. OK, they can raise insurance premiums for the loan guaranties but no one has mentioned who will pay for the $ 750 billion dollar "bailout".
Unfortunately, these are the only options the American people have at this time so. Congratulations. If you're an American taxpayer, you're about to become the owner of a brand-new $700 billion attempted bailout of the U.S. financial system.
You, I and our children and their children that is who will pay for the "bailout". That sure instills confidence in our banking and political systems for me, how about you?