Bailout Backlash

The story so far; $250 billion of the EESA budget has been earmarked to fund the Capital Purchase Program. The Capital Purchase Program is to have voluntary and non-voluntary participants. The non-voluntary participants include our top nine banks which represent half the nation's deposit base and are sharing $125 billion of the bailout. A further 20ish regional banks have also been selected to receive non-voluntary cash injections.
This leaves the remainder of the program budget available to be voluntarily applied for by the rest of our qualifying U.S. controlled banks, savings associations, and bank and savings and loan holding companies. The Treasury has made it clear that they are hoping the weaker banks will be bought out by the stronger ones, hence only healthy institutions who will give their new shareholder a reasonable return need apply. The application deadline is November 14, 2008 and the Treasury plans to distribute the entire Capital Purchase Program fund by the end of the year.

This strategy has already had a devastating effect on the share price of some perfectly solid institutions simply because they, a) were not selected for the program and b) chose, for the sake of shareholder confidence, not to apply for a handout. This in turn has resulted in these same institutions falling prey to the big boys with taxpayer's billions to play with
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National City's $5.2 billion sale to PNC, for example, was announced last Friday. National City was forced to close the deal at well below market price when it became apparent that it had missed out on selection for the Capital Purchase Program by falling just behind the top nine banks. PNC, on the other hand, has received $7.7 billion of taxpayer bailout money.

While it is true that National City was holding a large portfolio of souring mortgages and home equity loans, particularly in the Florida market, it was in fact the best capitalized large bank in the U.S. thanks to a $7 billion investment in April this year by New York's Corsair Capital. National City compared very favorably with other institutions, Marshall & Ilsley and Comerica, to name two, who have received bailout money, both on a tier one capital ratio and tangible common equity / assets basis. They were purchased for $2.23 per share while most analysts (with buy ratings on the stock) had targets of $7 to $8. See www.CNNMoney.co/magazines/fortune for more on the National City buyout.

Further speculation arose about the Treasury's Capital Purchase Program selection criteria when it was revealed that the Comptroller of the Currency, John C. Dugan, who makes these selections, was a PNC attorney before taking his current government job.
Perhaps the most important question though is, although many private investors are going to get hurt in the upcoming bank fire sales, will the U.S. taxpayer benefit in the long term?