Long Overdue Capital Injection
>
Here we are, more than one year into the credit crisis, and long after the collapse of Bear Stearns, and a month after Lehman Brothers, AIG, WAMU, Fannie/Freddie, Wachovia, etc. and we are getting a capital injection into the key banks.
As we noted yesterday, Paulson (and to a lesser degree, Bernanke) were way behind the curve in recognizing the Housing, Economy and Credit issues.
Although Paulson was against the capital injection, the Fed chair was not. the As Krugman noted yesterday, "this was also the solution privately favored by Ben Bernanke."
~~~
Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben S. Bernanke and FDIC Chairman Sheila Bair are scheduled for a press conference at 8:30 am . . .
graphic courtesy of NYT
>
\
>
Sources:
Joint statement by Federal Reserve, U.S. Department of the Treasury, and Federal Deposit Insurance Corporation (FDIC)
http://www.federalreserve.gov/newsevents/press/monetary/20081014a.htm
President's Working Group Market Stability Initiative Announcement
http://www.federalreserve.gov/newsevents/speech/bernanke20081014a.htm
Treasury Said to Invest $125 Billion in U.S. Banks
Robert Schmidt and Peter Cook
Bloomberg, Oct. 14 2008
http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=addCa.BISYDU
U.S. Investing $250 Billion in Banks
MARK LANDLER
NYT, October 13, 2008
http://www.nytimes.com/2008/10/14/business/economy/14treasury.html
Gordon Does Good
PAUL KRUGMAN
NYT, October 12, 2008
http://www.nytimes.com/2008/10/13/opinion/13krugman.html
Bank Bailouts to Make Recession `More Manageable,' Volcker Says
Chen Shiyin
Bloomberg, Oct. 14 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aCKGXbTNfSVI&
U.S. to Buy Stakes in Nation's Largest Banks
DEBORAH SOLOMON, DAMIAN PALETTA, JON HILSENRATH and AARON LUCCHETTI
WSJ, OCTOBER 14, 2008
http://online.wsj.com/article/SB122390023840728367.html
Intervention Is Bold, but Has a Basis in History
STEVE LOHR
NYT,October 13, 2008
http://www.nytimes.com/2008/10/14/business/economy/14nationalize.html
Tuesday, October 14, 2008 | 07:28 AM | Permalink
| Comments (58)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef010535802331970b
Listed below are links to weblogs that reference Long Overdue Capital Injection:
Comments
They had to leave some go under Barry.
With LEH taking $880B in debt down the tubes with it the financial crisis got that much more manageable with future injections.
If they would have invested sooner they would have needed 3-4 times as much money.
Posted by: John Borchers | Oct 14, 2008 7:34:08 AM
i believe you forgot to include WFC.
Posted by: jtk | Oct 14, 2008 7:43:11 AM
Banks that are bailed out should be banned from political lobbying until they pay the money back. Just like with Freddie and Fannie.
Otherwise they will lobby to sweeten the terms in the future.
Posted by: Tom E. | Oct 14, 2008 7:51:18 AM
from what i understand the preferred shares are not dilutive to current shareholders. this is preposterous. i'm all for capital injections but this is simply a transfer of wealth. how long does the taxpayer have to bend over and realize he is being taken. i sense a revolution in the making. time to hoard ag products
Posted by: harold hecuba | Oct 14, 2008 7:58:32 AM
Here we have J.P.Morgan topping the list...
Posted by: Aurora Borealis | Oct 14, 2008 8:04:04 AM
Charles Morris has a new piece that suggests "we may have reached the point where the cure is scarier than the disease."
"Amid the clamor over the crisis on Wall Street, the U.S. Treasury’s $700 billion Troubled Asset Rescue Program, or “TARP,” bill and the evolving collapse of the global banking system, little attention has been paid to the extraordinary credit extensions at the Federal Reserve. But these are now without parallel in Fed history, including during the Great Depression."
Looks to me like more (as Red Green would recommend) "living in denial".
Posted by: GreggT | Oct 14, 2008 8:06:26 AM
One cannot refrain from thinking that everything surrounding the financials demises is nausea , the pyromania men and their boards are still in place, the capital injection is blind folded (level 2/3 of many banks are dwarfing their nominal capital injection)
There is an explicit acknowledgement from all parties involved that no responsibility is to be questioned and no real remedy but expedients are available.
My best advise fix it and fix it well as it will come back very soon haunting the economies
Posted by: Philippe | Oct 14, 2008 8:13:18 AM
Barry:
Excellent web site. Told my son about it and he enjoys it too. Unfortunately I missed the explosion up yesterday. And since I work for the government, we are only able to get back in today at the end of today's prices. So by then I will have missed out on two up days. My question is do you think the profit takers will take it back down on Wed? I seem to be a great market timer but always in the opposite direction. Thanks.
Posted by: steve | Oct 14, 2008 8:14:30 AM
How many "injections" has Citi had now? Oh, this is money that hasn't been circulated yet, so its better. Now I get it.
Posted by: chad | Oct 14, 2008 8:23:57 AM
>>>>i sense a revolution in the making.
Thank God for the "Patriot" Act so the govt can protect itself from "we the people".
Posted by: Tigger | Oct 14, 2008 8:28:37 AM
I find it so ironic --maybe hypocritical--that so many how have lambasted Greenspan and his inflation of the markets by lowering rates, are now celebrating that this Fed and and Treasury are moving heaven and earth to support the markets. Yes, you can say this is different, but that's what Greenspan said at the time.
Friday during the last manic hour, they had some futures floor trader on CNBC or Bloom on camera saying Goldman was coming in with waves and waves of buying.
Talk about Front-Running. Is the SEC going to investigate this? I think not.
I am in cash. market is just too artificial for me and I'm wondering if it is just time to walk away.
Posted by: cloudy | Oct 14, 2008 8:39:37 AM
Recapitalizing the Banks is Simple
We just have to be honest about it. It doesn’t really take the governments buy-ins to solve the bank equity problem. Oh-unless your foremost concern is to protect the current shareholders (the largest being the same guys/gals that are maybe causing systemic collapse.)
There are huge amounts of cash waiting on the sidelines of the market to invest, ready and eager, and all willing to pour money into the banks--given the same deals as Buffet and Mitsubishi. Heck, even I would buy bank stock if I could get preferred at 10% (with the long bond at 4.15%), with warrants to buy shares in the future at a historically low price (a free long-dated option)! And as a preferred shareholder, would I get the right to vote my shares to install better management, oversight and risk controls to help stabilize and reform the system? There’s a bonus!
Let’s get this straight. People would line up around the block to buy bank stocks under these terms and the banks would be recapitalized by the willing and able, (you know, the people who actually save and invest for the longer term. We are out there.) But the bankers won’t sell enough shares at these terms to save the banking system. Why? Because they would be diluted. So instead they let their companies go up in flames and the paymasters at the US Government come in and give them fresh equity out of my pocket, but makes sure that the share values of the guys that caused this , and got rich off it, remain strong and undiluted. This is robbery on the grandest scale of all times.
Posted by: standup | Oct 14, 2008 8:42:25 AM
Socialism is indeed alive and well in America but this is socialism for the rich, the well connected and Wall Street.
The bad news is the American middle class are still on the hook for trillions and standard of living for most is likely to go down.
Posted by: km4 | Oct 14, 2008 8:43:47 AM
I think Paulson thought the republicans would never go for partial nationalization, even if it was the smarter thing to do, so he presented a horrible plan that congress could rework to it's liking, all the while keeping the backdoor open for the idea Bernanke favored... but maybe i'm not cynical enough!
Posted by: lalaland | Oct 14, 2008 8:50:53 AM
This is great!
I am really excited about this. You see, I thought we would all be standing in food lines within the next year. Instead, we will need wheelbarrows of cash to buy a loaf of bread in about 5 years from now! Woo-Hoo, but hey the mkt is up 2 days in a row, so it doesn't matter that my kids future is bleak and that my Tax bills are going to smother me!!
Right on.
Posted by: tss | Oct 14, 2008 8:58:18 AM
So many negative posts here after a 10% up day. That means many still have not covered and we get bond inflow today.
Posted by: John Borchers | Oct 14, 2008 9:01:18 AM
It looks like common and preferred dividends are suspended on
those banks "volunteering" to take the capital injections, according to Steve Liesman"s cursory reading of the bill. Any clarification? Anywhere we can see the full text?
Posted by: RK | Oct 14, 2008 9:01:45 AM
I'm going to sit this one out, until further notice. The moves that support the financial centers are a necessary condition, but not a sufficient one to send the markets back up for a long term run. There are two offsets that give me pause.
News Item: Pepsi to lay off several thousand. Credit probably had little do to with this. Lack of product demand was a more likely cause. The consumer is 2/3 of the economy, not the financials. If the consumer isn't buying, profits will decrease and so should stock prices.
Why might the consumer stop buying? Please note that oil prices are also rising with stock prices. Since oil is now considered an asset class and is not only a consumable any longer, due to clever ways to invest in the commodity and the oceans of money that flow towards it, this is the big unknown.
If oil resumes it's fall to the $60 - $80 range then the markets and world economy will reciprocate and shoot towards the stars. I'll happily help with this. If it soars to $90 and potentially beyond over the next several days then today's market levels may be only a congestion level and a long term companion. Or maybe they will drop from here. Regardless, the world banks will have only built a bridge to nowhere. That will be a fact and anyone who is thinking buy and hold today without considering the price of oil is just asking for trouble.
If oil goes back above $100 and remains there, Dow 6000 is a possibility this time next year. High oil prices are killing the world in slow motion. Even oil in the $80 range is troublesome, much like dragging an anchor or a ball and chain throughout the day and at home at night. Fix the oil markets, fix the world. Remember, high oil prices are no longer being offset by rising real estate prices or home refinancing that worked like an ATM.
Have a great day!
Posted by: dead hobo | Oct 14, 2008 9:03:53 AM
We seem to be following the same path as Japan. The plan is to make money easily available and all problems are solved. It didn't work in Japan because they're savers. The US, on the other hand, loves to spend. I guess we'll start over and get into an even bigger mess next time.
I wonder when the Asians and OPEC nations will catch on. If their politicians are anything like ours, they'll continue to accumulate dollars forever. It will always be easier than the alternative in the short term.
Posted by: charlie | Oct 14, 2008 9:05:21 AM
participating banks to stop paying dividends????
Posted by: Stuart | Oct 14, 2008 9:05:52 AM
Please, someone set me straight if these figures aren't right, but..
$250B capital injection into 8 banks with a market value (as of close yesterday) of $490B and we're not getting at least Buffett-like terms?
Puh-leez..., excuse me while I bend over to puke, in the course of which exposing my backside to further severe depradation.
Posted by: batmando | Oct 14, 2008 9:06:33 AM
Movies for Our Time: The New Century Trilogy
brought to you by Halliburton Adult Entertainment.
Episode 1-Things To Do In Baghdad For A Dollar
Episode 2-Nailin' Palin
Episode 3-Long Overdue Capital Injection
(When a headline screams out like this one did, you just gotta'. . .)
Posted by: randomguy | Oct 14, 2008 9:08:21 AM
The $250B buy is said to be NOT dilutive because these are perpetual preferred shares which are paid a dividend, not a portion of earnings. Aren't earnings diluted when you take a portion of them to pay dividends to a newly sold preferred stock? Is this claim, that this treasury buy isn't dilutive, credible?
Posted by: rational | Oct 14, 2008 9:21:01 AM
This stands a good chance of putting the wheels back on the wagon IMHO though we're still going the face rocky markets. And the real recession is still gathering steam. All that said this might constitute one of the best multi-generational investing opportunities ever.
But while we're critisizing the "Establishment" from saving us from our own follies you might want to listen to Krugman's press conference from yesterday where he's very balanced. Including this statement that he and nobody else saw this coming in this virulent a form.
Which is fair enough but both Ben and Hank started anticipating systemic risks and putting the pieces together in the last two years.
Paul also points out that the real problem was the growth of the shadow banking system and the failure to update and refresh the regulatory regime to meet this evolution. A systemic problem which a) happened on all watches, b) from which we all benefited
from while the getting was good and c)had no support for fundamental changes that we know acknowledge are required.
Before we hang all the guilty in the square shouldn't we first focus on addressing the problems ?
Posted by: dblwyo | Oct 14, 2008 9:23:08 AM
OOPS...here's the YouTube url to save you the loopup:
http://www.youtube.com/watch?v=tx6UJ-3oV_w
Posted by: dblwyo | Oct 14, 2008 9:24:39 AM
