Wednesday, October 15, 2008

Treasury funds for US banks

So Hank Paulson has finally bit the bullet. The US Treasury will put $250 bn in capital to banks as part of the $700 bn bail out. Clearly, asset purchase alone will not impress the markets. In the first staeg, $125 bn will offered to a list of banks that reads like a who's who of survivors, mind you, not the battered ones: Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, Merrill, Goldman, Morgan Stanley and two others.

What does this mean? Well, the word 'strong' is a highly relative term in today's context. Bank of America and JP Morgan Chase, Wells and Citigroup which were in the business of acquiring weak banks, are now certifiably in need of capital.

The banks would question this saying they never asked for capital and could have ridden out the storm. But the Treasury wants the top banks to do more than sit out the crisis. It wants them to lend so as to keep the economy from going under. So, this bout of recapitalisation is not so much about preventing bank failure as preventing a serious downturn arising from what the Treasury regards as inadequate capital.

The coupon rate of 5% on convertible preferred stock for the first five years, incidentally, involves a subsidy at today's rates.

3 comments:

Trade Meme said...

I guess the logic is : If the strategy works in Europe, surely it must work in the US.

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Akshay said...

Sir, could you please elaborate on "The coupon rate of 5% on convertible preferred stock for the first five years, incidentally, involves a subsidy at today's rates." I am unable to understand the relevance/importance of the coupon rates involving a subsidy?

Isnt it quite obvious that due to the lack of confidence the coupon rates etc. will automatically trade at a discount? I think I am missing something in this.

Thanks.