Increased Government Investment in Banks?

The Wall Street Journal was out with an article on Monday stating that over 1,800 publicly traded banks would likely seek access to the Treasury Department’s rescue plan.  While the total dollar figure being attached to the rescue plan is in excess of $700 billion, only $250 billion has been earmarked for bank recapitalizations.  While this is a large sum, it is increasingly looking as if more money will be needed given the sheer number of banks that have not yet received government investments. 

As we can see from the table below (via thestreet.com), nearly $170 billion has already been committed to supporting the institutions that control the majority of our banking system’s deposit base.  However, this leaves only $80 billion in Treasury funds for the support of our country’s remaining 8,000 banks, most of which are private and state chartered. 

In other words, it’s going to get messy from here on out as the Bush Administration will be forced to go back to Congress for more money, seriously reexamine the United States’ hybrid bank structure and be forced to develop an innovative method for delivering much needed capital to community banks.

These community banks will prove difficult to deliver capital to because they are either too small or unwilling to become public, yet they nonetheless serve a vital part in the American economy and will need government capital in order to ensure the success of the Bush Administration's bank bailout.  A simple division of the $80 billion dollars remaining among the 5,000 private and public banks likely to be working towards a government injection shows that they would on average receive a mere $16 million dollars, which is a surprisingly low figure and a cause for concern. 

Banks Receiving Government Investments
Bank	Ticker	Amount (in billions)
JPMorgan Chase	(JPM)	25.000
Bank of America*	(BAC)	25.000
Citigroup	(C)	25.000
Wells Fargo	(WFC)	25.000
Goldman Sachs	(GS)	10.000
Morgan Stanley	(MS)	10.000
PNC Financial Group	(PNC)	7.700
US Bancorp	(USB)	6.600
Capital One	(COF)	3.550
Regions Financial	(RF)	3.500
SunTrust	(STI)	3.500
Fifth Third	(FITB)	3.400
BB&T	(BBT)	3.100
Bank of New York Mellon	(BK)	3.000
KeyCorp	(KEY)	2.500
Comerica	(CMA)	2.250
State Street	(STT)	2.000
Marshall & Illsley	(MI)	1.700
Northern Trust	(NTRS)	1.500
Huntington Bancshares	(HBAN)	1.400
Zions	(ZION)	1.400
First Horizon	(FHN)	0.866
City National	(CYN)	0.395
Valley National	(VLY)	0.330
United Commercial	(UCBH)	0.298
Umpqua Holdings	(UMPQ)	0.214
Washington Federal	(WFSL)	0.200
First Niagra	(FNFG)	0.186
Old National	(ONB)	0.150
First Community	(FCBC)	0.043
HF Financial	(HFFC)	0.025
Redding Bank	(BOCH)	0.017
FFW Corp.	(FFWC)	0.007
Saigon National	(SAGN)	0.001
Provident**	(PBKS)	0.000
TOTAL		169.832
Source: The Financial Services Roundtable, KBW *Includes Merrill Lynch (MER)**Hasn't decided to participate

 

The government capital injections make investing in banks difficult as it allows for an added variable that investors must take into account. Nevertheless, as this video from Bloomberg discusses, there are several metrics that can still be used by investors to gauge the risk of their bank investments.  According to the commentator, tangible book value, normalized earnings and “excess” regulatory capital are all important characteristics that investors should be knowledgeable of when investing in banks.  Even if his conclusions are poorly timed, the commentator does a nice job of laying out the framework needed for conducting bank investments. 

As we saw in the forced National City (NCC) sale, banks that have taken government capital should be viewed as having received a seal of approval from the government and can be considered by investors as safe havens in the financial sector and are more likely than not trading at once in a generation prices, regardless of the weakness in the economy going forward. 

Comments

[mik123:]

If TARP states the money can not be used for acquisitions and can only be used for lending as Barney Frank stated Friday, I don't see how there will be regulatory approval on the PNC -Nat City deal. That's probably why you haven't heard of any other deals. National City can stand alone and save thousands of jobs. TARP was passed to help National City. It appears Nat City was pushed into the merger by a top treasury official that worked for PNC as an attorney until Aug. 2005. He probably will be back representing PNC after todays election. Call Latourette, Barney Frank, Sen Shumer and your local house and senate representatives and demand National Citys share of TARP. There is no way they can be denied since Citigroup and others with inferior financials to Nat Citys received funds. Prior to the merger announcement, there were 10 buy recommendations by analysts who follow the company in detail. I believe the deal has an escape clause if it doesn't receive regulatory approval. Barney Frank came out Friday and said it's illegal to use TARP money to acquire another bank. That should make the deal null and void. The top three officials at Nat City are walking away with apx. 16 million. If they accepted TARP money and stayed independent, they would be limited to $500,000 max. compensation per year. All this poses many questions.

2008 Nov 04 08:47 AM

[sumosama:]

I have read the details of the package and I believe Barney is making it up as he goes along. I did not see any restrictions on usage of the money. Specifically, as he was whining about, I did not see any requirement for the money to be immediately lent out.

Further proof that knee jerk reactions makes for bad law.

2008 Nov 04 10:15 AM

[MichaelZZ:]

NOTE: Mergers should not affect Equity Capital, thus this is a red herring.

Larry Kudlow, about 10 days ago, interviewed Henry Paulson and asked the remarkably ignorant and inane question as to what the implications would be if these institutions used the funds from the preferreds to pay down debt.

An Accounting 1a student should know that would have no effect upon Equity Capital, i.e., cash and liabilities would be reduced.

Either this was a "set-up" question or Paulson is an example of the blind leading the blind, i.e., he is in over his head, since he made no response to correct Mr. Kudlow's "thinking".

Sad stuff!!!

2008 Nov 04 10:57 AM

[MichaelZZ:]

PARAPHRASING ISAAC: Objects in motion tend to remain in motion, objects at rest tend to remain at rest, and to change either condition, requires energy.

In this case, the energy factor should be effected by Congress by legislating the appropriate fiscal adjustments, i.e., immediately (do not wait until 2010) repeal those portions of the Bush tax legislations for those with taxable incomes in excess of $200,000 (arbitrary, i.e., could be $225M, $230M) and legislate permanent tax reductions for those with taxable incomes under $80,000.

This will be the energy factor, which will prime the engine of our economy. The longer it takes to do this, the more problematic will be the results.

A one-shot stimulus package will not work, as the recipients will pay down debt or add to savings due to insecurities, whereas a permanent tax reduction will mean that they will see their net paychecks increase and will have greater confidence. Unless consumers increase their collective confidence and spend, the situation will become much graver.

THE PARAMETERS OF THE FIRST TRAUNCH/TRANCHE OF THE $125 BILLION SHOULD BE CHANGED:

1) Only those institutions who want the funds should receive, i.e., none should be coerced into taking

2) The dividend rate should be changed to, at least 11%, for the purpose to stimulate the institutions to attempt to raise capital from private sources. They would know that they have the backstop of the 11% preferreds.

3) The conversion factor should be significant

4) As in the case of the Buffett purchase of GS preferreds, there should be substantial long-term warrants

5) The "fund" should be given seats on the Boards.

6) All dividends, other than any preferred stock dividends should be deferred for one year and will be re-assessed at the end of the year

7) There should be a moratorium for any bonuses and this will be reevaluated at the end of the first year

8) Those institutions which do not accept the "fund's" requirements and eventually fail, and which will have exacted bonuses will place in civil and criminal jeopardy those recipients of the bonuses. The punishments will include imprisonments and the return of the bonuses plus substantial monetary penalties.

The common shareholders will be adversely affected (much of which has already been reflected), but that is appropriate.

CAPITALISM WILL BE ALIVE AND WELL.....................

2008 Nov 04 11:04 AM

[I should know:]

mik123
Nov 04 08:47 AM

If TARP states the money can not be used for acquisitions and can only be used for lending as Barney Frank stated Friday, I don't see how there will be regulatory approval on the PNC -Nat City deal. That's probably why you haven't heard of any other deals. National City can stand alone and save thousands of jobs. TARP was passed to help National City. Blah, blah, blah. . .

Call Latourette, Barney Frank, Sen Shumer and your local house and senate representatives and demand National Citys share of TARP. Blah, blah, blah. . .

**********************...

YEA, Barney Frank, there’s a pillar of credibility and knowledge. I think he is one of the miscreants that got us into this mess. Yea, call Barney, call bleeding-heart Shumer, see what those two nincompoops can do for you.

Sorry about the National City stocks you bought on the “recommendation” of 10 or so nitwits.

2008 Nov 04 12:21 PM

[flow5:]

MichaelZZ - who creates jobs...the poor? Disincentives for the rich don't work. And I don't remember where the rich actually pay that large of a percentage anyway...i.e., increases in their taxes will not produce substantial revenues, but are likely to result in fewer jobs.

Everyone pays too much tax. Governments should be smaller. Spending should be smaller. Unilateral transfers to foreigners can be almost completely eliminated. The only item in the Federal Budget Deficit that can't be reduced is interest (from an economic standpoint).

We need to reduce our dependence on foreign oil, increase our competitiveness in world markets (sell higher quality & lower cost, goods & services), etc.

2008 Nov 05 02:25 PM