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Monday, October 13, 2008


$250bn in capital for TBTF

via calculated risk -- the TARP has been transformed into a capital injection vehicle for the too-big-to-fail list.

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.

good luck to those regional banks and others who may have hoped to dump some bad assets on the TARP at unreasonably high prices. looks like such banks are chum in the water for banks on this list, all of whom will be seeking to snap up deposit bases out of FDIC receiverships forthwith.

the big question of course is "will it work?". color me skeptical.

UPDATE: minyan peter:

$250 billion, while good, is insufficient and it's not common stock: It's preferred.

... Most troubling to me in all of this is the inherent assumption on the part of Treasury that what we have is a liquidity crisis, not a solvency crisis.

The system needs more capital: common shareholder capital.

UPDATE: david merkel:

What is not new is the idea that all we have to do is restore confidence, and everything will be fine. No, we have to delever, and the US Gowernment is included in the list of those that need to delever. There is no national reform going on here, but merely a shifting of obligations from private to public hands.

... There are elements of this that remind me of my The US Dollar and the Five Stages of Grieving piece. This is for two reasons: first, we are asking foreign entities to hold more dollar claims at a time when they are stuffed full of them. Second, this phase of the credit crisis reminds me of the “bargaining” phase of the five stages of grieving. We are past a long denial phase, and the anger continues, but now we bargain that these proposals will allow us to escape the pain that comes from delevering.

I’m skeptical, but I hope that I am wrong, lest we get to the fourth stage “depression,” before we finally reach “acceptance.” As it is, I am looking for companies with blaance sheets strong enough to survive the worst. That is my task for the next few days.

UPDATE: bloomberg relays that paulson sees taking stakes in many, many banks in time. but then there's enough dissembling and cant in his comments that i doubt one can take anything he is saying at face value.

UPDATE: clusterstock describes the basic problem with these capital injections at current asset prices -- with massive future writedowns looming as house prices continue to correct and consumers retreat and delever -- repeating the logic of paul de grauwe.

A key component of successful financial system bailouts in the past has been forced asset writedowns, in which the government makes banks reduce the carrying value of this assets to nuclear-winter levels before the government injects new equity.

The government may be hoping that 1) the writedowns are done, or 2) the banks can just slowly write off the rest of their crap assets against earnings over the next several years (thanks to the elimination of mark-to-market accounting). Given the magnitude of the projected losses, this seems like wishful thinking.

Alternatively, the government may plan to just keep injecting more and more capital until the writedowns are finally done. If this is the plan, however, other private-market investors are unlikely to follow suit.

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