Opportunity in the Paulson Backlash

The New York Times “New Terrain for Panel on Bailout” reports on a secretive five member panel that decides the winners and losers in the TARP. Banks apply with a two page form which is rated 1 to 5 by their primary regulator. Ranks 1 and 2 are assured of participation and rank 5 is automatically rejected as too weak. The committee of five, along with a small support staff of 40, determines the fate of the others. Treasury Secretary Paulson is refusing to honor his promise of transparency by not disclosing the selection criteria and goals.

The track record of the TARP is already clear, and it has nothing to do with the stated goals of recapitalizing healthy banks to promote lending and mortgage modifications. Though the stated goals might be a side dish, the main course is to consolidate the banking systems into stronger hands. The big four (BAC, C, JPM and WFC) get their pick of weaker regional banks, and the stronger regional banks (BBT, FITB, KEY, PNC, RF and USB) get their pick of the rest. And Paulson wants to get the job done before the Bush Administration loses power.

Congressman Barney Frank feels duped. He and his fellow Democrats see the TARP being used to support mergers, dividends and executive bonuses. The money goes out as fast as it comes in without any benefit to businesses and consumers. They are not convinced that a stronger banking system will trickle down benefits fast enough. Paulson’s need for urgency is becoming even more acute as Frank is scheduling oversight hearings this month.

What is the investment angle of the backlash? Mergers and executive bonuses surely won’t be curtailed. Banks are already claiming they need to pay bonuses for competitive reasons. The angle I see is the possible temporary reduction or elimination of dividends, which might even include preferreds and deferrable bonds. This could create a buying opportunity for patient investors. Remember how the GSE preferreds collapsed after the dividends were eliminated.

Disclosures: Author is long BAC, C, FITB, KEY, RF and WFC.

Comments

[hamptoner:]

Barney Frank had a big hand in getting us into this mess...so he'd better shut up!

2008 Nov 04 06:06 PM

[Mike McGinley:]

All this bullshit was an asset grab. Incredible.

2008 Nov 04 09:38 PM

[mik123:]

Barney Frank was duped. Let's see the criteria for selection for TARP and who is on this 5 member panel. Don't rollover about National City.This may be the biggest bank heist of the century.They can stand alone and save thousands of jobs. TARP was passed to help National City. Paulsons sales job to the public,house and senate leaders was quick passage so they can start buying troubled assets. Then it was a different story after passage. National Citys competitors in Ohio that did receive TARP have seen their stock go up apx. 50% since the Oct 24 announcement of the PNV- Nat City. Look at Fifth Third, Keybank ,etc It appears Nat City was pushed into a merger by a top treasury official that worked for PNC as an attorney until Aug. 2005.It was said that he called Nat City a week before the merger announcement and said don't expect Fed help. He probably will be back representing PNC after yesterdays election. PNC gets 5.1 billion upfront tax benefit, 2 billion in cash, and 1 billion in Visa stock totaling 8.1 billion benefit. PNC is only paying 5.2 billion. Call Latourette, Barney Frank, Sen Shumer,Chris Dodd 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. They won't disclose the selection criteria because it would expose the National City heist and conflicts. They can't because they gave Goldman Sachs 10 billion for no reason.Goldman has no troubled loans or assets. There was nothing to rescue. This reminds me of the secretive group from industry that Cheney put together to establish energy policy for the United States. 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 after tax. If they accepted TARP money and stayed independent, they would be limited to $500,000 before tax compensation per year. That's a huge difference.

2008 Nov 05 08:15 AM

[monday1929:]

This IS Fascism in action- the favoured and connected are fed the weak and unprotected. Jamie Dimon's jowls glisten with anticipatory drool.

2008 Nov 05 08:38 AM

[sumosama:]

hard to believe anyone could pull anything over on Barney!!!

This does stink to high heaven! I am just not a conspiracy theorist as I don't believe these folks are smart enough or quiet enought to pull one off.

2008 Nov 05 12:51 PM

[Big Al45:]

The top three criteria for getting bailout money are

(1) the amount of money donated to the Republican party by the applicant's executives

(2) The number of bank executives that went to college and/or private school with the members of the evaluation committee

(3) Whether Goldman Sachs' trading desk is long or short on the applicant's stock.

Only 77 more stealing days left until the new administration takes over.

2008 Nov 05 03:37 PM