The Nuances Of Paulson’s New Bank Equity Bailout

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Treasury Secretary Paulson announced his latest components of the TARP this morning. Loosely based on a plan announced last week by the British government, the Treasury announced equity injections in “healthy” banks totaling $125 billion to shore up bank’s capital as an effort to restore confidence and to encourage lending and private investment. An additional $125 billion will be allocated for small and medium size banks who have until 5:00 PM November 14, 2008 to sign up to participate.

Secretive Scorpio (lending) and fast moving Mars in Scorpio were rising on the eastern horizon* when Paulson began speaking. The Treasury’s capital injection plan is effective immediately, but neither Paulson nor Treasury documentation discloses who the nine participating banks are. The New York Times and other media outlets are reporting they are: Bank of America (BAC), Bank of New York Mellon (BK), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), Merrill Lynch (MER)**, Morgan Stanley (MS), State Street Corp. (STT), and Wells Fargo (WFC). This afternoon Treasury announced that Bank of New York Mellon was awarded the contract to serve as custodian for the implementation of the TARP.

Before I get into a brief analysis, here’s a summary of the new programs from the Treasury, FDIC, and the Federal Reserve:

How the Capital Injection Works
  • The Treasury will purchase senior preferred shares (Treasury’s shares come first if an institution has more than one class of preferred).
  • These shares will pay a cumulative quarterly dividend in arrears on February 15, May 15, August 15, and November 15 of each year at a rate of 5% a year for the first five years, increasing to 9% in year six. (Non-cumulative for banks without holding companies.) If dividends are not paid in full for six dividend periods (doesn’t have to be consecutive), the government has the right to elect 2 directors to the Board.
  • Treasury’s capital injection will count as Tier 1 capital (which will make the ratings agencies happy). Participating institutions will have to maintain the new capital amount for three years even if they pay back the government before then.
  • Treasury will receive 10 year Warrants with an aggregate value of 15% of the senior preferreds that they purchase. The strike price will be calculated as the average closing price over the prior 20 trading days.
  • Treasury has the right to sell the senior preferreds and the warrants to a third party at any time.

Executive Compensation Rules
The compensation rules apply to CEOs, CFOs, and the next three highest compensated executive officers. The bottom line is there are no caps on executive pay packages for participating institutions, other than a line thrown in to try and placate the public that participants should “ensure that incentive compensation does not encourage unnecessary and excessive risks that threaten the value of the financial institution.” Compensation and golden parachutes (for departing executives) over $500,000 is no longer tax deductible for participating financial institutions. Forcing an executive to return bonus or incentive compensation (“clawback”) would require proving they made “statements that are later proven to be materially inaccurate.” Golden parachutes are still permitted except when the government makes a “direct” (non-voluntary) injection into a failing firm.

FDIC Temporary Liquidity Guarantee Program

  • These two programs should particularly help community and regional banks. Unfortunately the plan arrived too late to have saved IndyMac Bank and Washington Mutual.
  • Funds above $250,000 in non-interest bearing FDIC-insured bank accounts will be guaranteed by the FDIC until December 31, 2009. This will provide confidence to businesses that their funds are safe, and help provide stability to community and regional banks.
  • Financial institutions issuing new senior unsecured debt (such as commercial paper) on or before June 30, 2009 will be guaranteed by the FDIC for up to three years, regardless of the debt’s maturity.
  • All eligible financial institutions are automatically covered in both programs for 30 days. After that time, institutions must either opt-out or begin to pay a 0.10% surcharge on their deposit insurance premium. The debt guarantee fee is 0.75% per year.

Federal Reserve Commercial Paper Funding Facility (CPFF)
To help unfreeze the credit market, starting October 27, 2008 the CPFF will provide a liquidity backstop to U.S. issuers of commercial paper rated at least A1 through a Special Purchase Vehicle (SPV) that will purchase eligible 3 month unsecured and asset-backed commercial paper from eligible issuers financed by the Federal Reserve Bank of New York. PIMCO will serve as asset manager, and State Street Corp. as custodian and administrator. Daily lending rates will be posted on the New York Fed’s website at 8:00 AM ET each day. The program ends April 30, 2009, unless extended by the Fed.

To quote Fed Chairman Bernanke this morning, “History teaches us that government intervention often comes very late.” Now that the government is beginning to put the confidence crushing moral hazard ideology aside, Treasury is wasting taxpayer dollars by injecting it into banks that don’t need help, such as Bank of America and JPMorgan to cover up the fact that Citigroup does. Paulson said this morning the nine banks “volunteered” to participate. Paulson called the above-named bank CEOs to a 3:00 PM meeting at the Treasury yesterday to inform them of their “voluntary” participation in the program. Saturn in Virgo (government) opposing Uranus in Pisces (in the house representing banking) reflects the shock and disbelief some of the CEOs had when Paulson informed them of their voluntary participation. With the Moon in Aries opposing Mercury,*** a very heated and emotional exchange probably ensued.

The Fed allowed investment banks Goldman Sachs and Morgan Stanley to become commercial banks. Goldman is being force fed an injection to cover the fact that Morgan is ready to be put on life support. Mitsubishi UFJ Financial went through with its 21% stake in Morgan yesterday after revising the deal’s terms. Yesterday’s Wall Street Journal reported that Mitsubishi and the Japanese government wanted assurances from Paulson that Mitsubishi’s investment in Morgan wouldn’t get wiped out by any action from the Treasury.

Once again, another Paulson plan reflects the Treasury tipping the scales of balance to favor Wall Street above Main Street. Goldman and Morgan Stanley are less likely to deploy the capital they received from the government to consumers and small to medium sized businesses. Not that making mortgage modifications and loans with the capital are a requirement under these programs. Paulson described the new programs as “extensive, powerful and transformative.” That certainly describes Mars in Scorpio in the announcement chart. Venus, the planetary ruler of banks, is also in Scorpio. But with Scorpio, there’s always something more that’s hidden beneath the surface. With the Sun in Venus-ruled Libra in the house representing secrets relating to the Administration, and Mercury retrograde in Libra in the house representing Congress, there is more that we don’t know about than we do. I think the next Congress could revisit and revise some of the arrangements the Treasury has made because this chart is not showing enough support for the American public.

*Paulson began speaking at 8:44 AM EDT October 14, 2008 Washington, DC.

**Merrill Lynch is being acquired by Bank of America.

***Corrected error October 15 at 8:34 AM from originally incorrectly stating "Moon in Aries opposing Mars", to read "Moon in Aries opposing Mercury"; added link to current Weekly Forecast to make this more understandable.

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