Deploying Paulson’s Capital: The Strong and Weak of It

The BB&T (BBT) conference call Thursday morning gave more insight into the TARP Capital Purchase Program than any public comments from Treasury Secretary Paulson and Federal Reserve Chairman Bernanke. BB&T stated repeatedly: Paulson said the program is to buy senior preferred stock in stronger financial institutions so that they could deploy the capital to new loans. But, the first $125B round included Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS) – all banks which BB&T considers weaker. JP Morgan (JPM) said during yesterday’s conference call that the program would benefit its competitors far more than itself, but for the sake of the country they would sacrifice. JP Morgan conceded that the price was right.

BB&T said that they would consider using the program as an inexpensive source of capital to support acquisitions. BB&T made it clear that there were not enough creditworthy customers to support the lending power it already has. JP Morgan said that they would deploy the capital profitably for shareholders, but it was too early to say exactly how. FDIC Chairwoman Sheila Bair alluded that Wachovia (WB) might have survived independently if the program had started earlier. I have not heard any banks or other government officials support Paulson and Bernanke’s claims that the program will flow money through to businesses and consumers loans.

Maybe we should rename the program “Paulson’s Save the Banks too Big to Fail Program.” Citigroup, Goldman Sachs and Morgan Stanley are too big to fail; and Bank of America (BAC), Bank of New York Mellon (BK), JP Morgan and State Street (STT) were brought along to remove the stigma. Merrill Lynch (MER) and Wachovia (WB) were indirectly included by their mergers. Even the strong amongst this group encountered bear raids, so this cushion can’t hurt.

By this time everyone knows the basics: 5% dividend for 5 years then 9%, perpetual term, callable in 3 years, cumulative for holding company banks and non-cumulative for non-holding company banks. The Treasury directs that the participating institutions must maintain the increased capital level by restricting early redemptions to replacement by a “Qualified Equity Offering”. While the Treasury is forcing more capital on the books, it has showed little enforcement power over its use. The guidance to deploy is only for the public’s consumption.

With all the detail in the “Summary of Senior Preferred Terms”, BB&T is still unsure of the Treasury criteria for distributing the next $125B round of the program. Amongst regional and community banks, will only the strong be funded? Will the Bush Administration revert back to Darwinism or try to save as many banks as possible? Certainly Paulson could provide us with some clarity.

Disclosure: Author is long BAC, C and WB. 

Comments

[g7enn:]

There is no strong of it. It's the same old con game brought to us by those who perpetrated this financial debacle in the first place. Bank inter lending rates and mortgage rates have increased since the plans announcement indicating investors aren't falling for it. The preferred stocks scam is simply a loan in perpetuity for Paulson's bank mafia (sorry to insult the mafia who are a least loyal to the US) with no chance of a profit and little chance of a payback.

The key to solving the problem is writing down these mortgage backed securities, which hasn't been mentioned because so many are worthless that it would reveal the gross fraud perpetuated on the American people. Without a write down the banks will not trust each other and continue to hoard any money they are given in order to meet asset requirements. Sweden fixed a similar problem years ago in a few years and lost very little in terms of GDP but they forced banks to write down their loans. This is getting worse by the day. Unless the criminals running this country are removed from office forthwith and replaced with honest people like Kucinich and Paul, there is no hope and the system will crash.

Expect a downgrading of America's credit at any time and a crashing of the dollar. America's credit is rated junk by Marc Faber and he's one of the best in the business, predicting this present crisis years ago.

2008 Oct 17 09:34 AM

[helplessobs...:]

As a shareholder I know BBT very well. I hope the government does not stink up BBT with some plan to have them inject their excess capital into their sacred New York banks. Bloomberg is already reporting big chunks of federal money lent to AIG has been transferred to GS, MS and New York Banks.

2008 Oct 17 10:21 PM

[BlueOkie:]

Too late to close the barn door now! Let the "invisible hand" of Smith deal with this. The poor man who couldn't afford to buy his house may be forced to move. The banker who loaned him the money may lose part of his shirt. Kucinich and Paul are filling their coffers to run for the House and not the White House.

2008 Oct 19 11:43 AM

[tomhill9:]

Lawsuit Filed to Block Wachovia Sale

milwaukee.bizjournals....

Contact Information if you want to join class action lawsuit:


www.wolfpopper.com/con......

email: [e-mail]

Mail:

Wolf Popper LLP
845 Third Avenue
New York, NY 10022

Toll Free Phone: [phone]
Toll Free Fax: [phone]

2008 Oct 20 09:47 PM