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Paulson plan unfair to healthy banks

Posted Oct 14 2008, 07:01 AM by Douglas McIntyre
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One size fits all. That is the reasoning behind Treasury's plan to invest money in a number of large banks by purchasing preferred shares.

Jamie Dimon of JP Morgan and Lloyd Blankfein of Goldman Sachs have to feel that they have been sacrificed on Henry Paulson's bank bailout altar. Healthy financial companies are being told that they must take on the burden of new debt, whether they want it or not. Whether they need it or not.

The new program will put $250 billion in cash directly into banks and Treasury will get an equity piece. The agency is using preferred shares so that current holders of common stock are not diluted.

The plan has one very deep flaw. JP Morgan has to take on $25 billion which is the same amount as its much weaker rival Citigroup. The market certainly views the risk presented by the two companies differently. Since the beginning of the year JPM shares are flat. Citi is off more than 45%.

A look at Goldman Sachs and Morgan Stanley is also a study in contrast. Goldman is down less than 50% since January 1. Even with a huge rally in its shares yesterday, Morgan has fallen nearly 70% during the same period. Paulson is force feeding $10 billion into each institution, although one is almost certainly healthier than the other.

Treasury would make the argument that time is short. It may only have a few days to restore confidence in the banking system. Cutting the healthy cattle out from the herd would take too much time.

But, that reasoning is feeble-minded. Money raised by JPM has put its capital position, based on its Tier 1 ratio, at over 8%. The market expects more write-offs at Citigroup than it expects at JP Morgan.

Banks do have relatively standard measurements of health. While these may not be perfect, they are almost always directionally correct.

Paulson has done the best banks and brokerage firms a disservice. He has also undermined his own program. While $700 billion is a lot of money, there is still not enough to go around given how deeply wounded the banking system is. He could have saved the money he is putting into the healthy and used it for the sick.

Top Stocks blogger Douglas A. McIntyre is an editor at 24/7 Wall St.

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Comments

 

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One aspect of the current financial sector is the amount of consolidation taking place where stronger banks are taking over weaker banks at bargain basement prices. While this is necessary in the interim to restore stability in the sector, long term we should never let one company and it's underlying asset base/exposure get so big it could place the country's or world's financial economy at risk. So once things are stabilized there should be a concerted effort to break up big banks, promote competition and force greater transparency. This and other structural reform of our global financial system ( www.savingtoinvest.com/.../global-rescue-plan-americas-falling.html ) is key to making the global rescue succesful in the long term.

We need a depression to clear out all the lifers addicted to congressional crak called living on the dole....check out their insurance and retirement benefits ....no wonder they never leave like a house full of roaches...dumbocrats and republicrats neither party gives a damn they have bankrupted our naiton they are not affected at all they do not know what a real job is....ie; Biden, Kennedy etc lifers on congressional crak

10 TRILLION in debt and going up daily thanks to both parties spending past 40 years

Do you even understand what they're doing or are you just writing? Taking on capital is not the same as issuing debt. Learn how to read a balance sheet.

"Hurt" is not the right word. They aren't diluting the shares of current stock holders, and they are injecting cash into the companies, the better companies will be able to use that cash more effectively to return gains. As the plan doesn't recquire overly agressive payments (i.e. a lot of foriegn funds, Warren Buffet, etc, recquired 10% dividends on the loans they made banks with options if the price ever matured).

So good banks will be able to use that capital effectively. This is the same deal that Chrysler got in the late 70s, and it worked out fine. Eventually the banks repay the "loan" which is what it is, with a profit to the government.

And since when is JPM or Goldman Sachs that great? JPM is diluting their stock with acquisitions, and Goldman Sachs had to take 3 billion from Buffet in "an emergency" You should really look at these things more before blogging.

Behind the scenes, there are no republicans or democrats.  They are the same people bankrupting the nation.  Notice all the major buy outs, and now the bank consolidation thats happening not only in the USA, but around the world.  Can anyone else see a trend?  All power is being consolidated............need i say more?

these people chose money over the Citizens of the United States of American. Domestic-incorporated in the State of Delaware, USA. Terrorists-they accomplished what the 911 Terrorists failed to accomplish, the collapse of the US Economy, "the Economic Pearl Harbor"-Warren Buffet.

You want the list?

Delaware: Freddie Mac, Fanny Mae, Bank of America, Wilmington Trust, First USA / Bank One / JPMorgan Chase, AIG, Citigroup, Deutsche Bank, Barclays plc, GM, Chrysler, Wachovia, ExxonMobil, Chevron, ISDA, and those States with Corporations Incorporated at Delaware.

Reconize any names?  Don't know who the ISDA is?  Robert Pickle is the CEO.  So we are in a Pickle, LOL.  The ISDA is the one that charges a usary interest rate on losses.  So that raised the actual 700 Billion USD to 60-100 Trillion USD.

If you are going to really fix this you have to start with the ISDA, because they are International that is how this became the Global Economic Crisis from the US Economic Crisis.  Check isda.org for the office locations and the members that are on other Corporate Boards (of National and International banks).

Note: Thursday before the Bailout, the Chinese stopped loaning us money, they think we are deadbeats, and will default on the loans.

Poor Hank piles Pelion upon Ossa (look it up).  His force-feeding is a kneejerk response to his two big failures so far;  First he forced Lehman into bankruptcy. That had the effect of destroying depositor confidence in all banks.  If the Feds were'nt going to rescue a massive household name, what happens to my savings?  Second, he took Freddie and Fannie into state control with zero compensation for shareholders. That had the effect of destroying investor confidence in recapitalising all financial companies.  It's only a few months since those same shareholders poured billions into F&F to keep them going, so if the Fed might just expropriate you a few months later, why would you buy new stock now to bail out an existing investment?

So, having created a situation where runs on all banks were starting to happen in a small way and could only get much bigger very quickly as depositors moved their cash to gold or Treasuries and professional investors refused to throw any more money into the pot to stop the rot, Hank now has to stop the incipient bank runs and replace the private cash that's (very sensibly) gone awol.  Presumably he'll come to his senses once implementation begins and he'll introduce the European scheme, where you only get bailed out if your capital ratios are below benchmarks. Here's hoping this isn't Paulsen's third strike.  The financial World Series is on the line here.

In the free market we have established here in the great USA I think the press and only the press have created this monster.  If they didn't blow up how the less then 1% of banks are in trouble the market wouldn't have tanked and the tax payers that pay thier bills would not have to bail out the big boys from making bad decisions. Think back to the late 90's when all of these sub prime lenders were making hand over fist in profits for taking on the more risky loans. Now that the market has shifted they are crying wolf. In my opinion let the chips fall where they may. The smaller banks are doing just fine. Again this whole mess is limited to less then 1% of the banking industry and its those banks that made bad decsions; and those decisions were made because our government wanted "looser" guidelines so more Americans could become homeowners so the local governements would receive more tax dollars. Well here we are stuck in a mess created by our fine government and backed by the banks that are now being bailed out by me the tax payer that pays his bills, pays his mortgage, and asks for nothing in return. I am really sick of hearing about those banks that reaped all the benifits over the last 10+ years and now are crying for someone to help them. I'm sorry but I don't make millions of dollars to run a company into the ground like many of these CEO's have done.

sounds like a dictatorship rather than a democracy to me

did the guy who wrote this make it past the sixth grade? what an idiot..........

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