While the initial focus of the Federal bailout was on purchasing mortgage-backed securities and whole loans, the Treasury’s emphasis has shifted.
Following similar moves by European authorities, the U.S. Government has announced that, before the end of the year, it will spend $250bn of the $700bn bailout fund to partially nationalize our banking system by buying up stocks in nine of the nation's largest banks. A joint statement by Treasury Secretary Hank Paulson, Federal Reserve ChairmanBen Bernanke and head of the Federal Deposit Insurance Corporation Shela Bair described the plan which, it is hoped, will stimulate business and consumer lending and prevent the economy from tipping into a deep recession. For each dollar "force fed" to a lending
institution its lending reserve increases by $10.
According to Interim Assistant Secretary Kashkari, the goal of the Federal bailout remains, "to restore capital flows to the consumer and business that form the core of the economy".
Apparently it was decided that the original plan to buy up bad loans from any bank that came forward would result in temporarily saving institutions which are, in fact, beyond saving, thereby wasting taxpayers' money. The new scheme will allow the biggest banks , rather than the government, to undertake the task of saving faltering, but viable, smaller banks who are losing many of their small business accounts due purely to confidence issues.
The FDIC will supplement the planned equity purchases by temporarily insuring loans between banking institutions and business bank deposits. Consumer deposit insurance limits will be temporarily increased to $250,000. It is not clear how long this additional insurance will stay in effect. President Bush has stated, "these measures are not intended to take over the free market but to preserve it".
My assessment is that the success of this strategy depends entirely on how quickly and on what scale the anticipated lending frenzy commences. There are currently no indications that legislation will be introduced to enforce lending levels so we are depending on moral suasion which makes the timing of an economic turnaround hard to predict.
The saga continues……………
Wednesday, October 15, 2008
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3 comments:
Great commentary, Phil. It is interesting to hear that the banks are using the bail out money to buy other banks instead of assisting the home owners. The buyers for properties are certainly out there and we are currently receiving multiple offers on our listings. Good offers. It is unfortunate, though, that the banks are not addressing the offers in any reasonable timely manner. In some cases, we have seen them ignore or turn down good offers and foreclose instead. Let's just hope that they get a handle on all of this soon.
Thanks for your comments, Phil. With TARP providing an alternative government-sponsored capital access strategy, it will be interesting to see if smaller financial institutions delay or abandon proposed capital raising plans in favor of TARP. It will, in the short run, be especially hard to beat the advantageous terms offered by our government if one was already considering a capital raise involving preferred stock. Many of my investment banking friends tell me that this is a great time to buy more troubled institutions, so M&A activity at the expense of real lending may be a problem.
Agree with anonymous. One of the first uses of the funds was for PNC to virtually "steal" Nat City, a bank that was actually in pretty good shape, not withstanding the shareprice.
Phil
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