Skip to main content

Treasury to buy stakes in 'healthy' banks

As mentioned in our weekend "Features" post, the US Treasury recently announced its intention to buy direct equity ownership stakes in US banks.

Those plans come into clearer focus Monday, as Treasury official Neel Kashkari, speaking in Washington, offered a few details on this latest feature of the government's $700 billion bailout plan.

Bloomberg reports, "Treasury to invest in 'healthy' banks, Kashkari says":

"Neel Kashkari, the U.S. Treasury official overseeing the $700 billion rescue of the financial system, said government equity injections will be aimed at ``healthy'' firms.

``We are designing a standardized program to purchase equity in a broad array of financial institutions,'' Kashkari, who heads the department's Troubled Asset Relief Program, said in a speech in Washington. ``The equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions.''

U.S. officials are hurrying to address frozen credit markets that led France, Germany and Spain to agree yesterday to commit $1.3 trillion to guarantee interbank loans and take equity stakes in banks. Buying shares of financial institutions has become the latest focus of Treasury Secretary Henry Paulson's rescue plan.

``While the U.S. tends to shy away from nationalizing or even partially nationalizing its financial institutions, it would appear that it has no choice but to follow suit,'' Win Thin, a senior currency analyst with Brown Brothers Harriman & Co. in New York, said in a research note today."

More commentary on the evolving state of the bailout bill is offered in this accessible piece from CNN Money, "The bailout takes new form":

"Though it was not part of the initial proposal, the Treasury is using its authority from the bailout bill in order to buy up shares in banks on a voluntary basis. Though the Bush administration did not initially want the government to take equity stakes in private financial institutions, the Treasury determined that the deepening credit crisis necessitated more direct government intervention.

By buying up banks' stock, the government would directly inject much-needed capital into banks. The Treasury will only buy up shares of "healthy institutions," and will encourage participation by offering "attractive terms," according to Kashkari. The government hopes that the move will inspire banks to raise private capital as well, inspiring new confidence in the credit markets, so normal lending can resume.

But few details were offered, including criteria for a participating bank, what the bank will be offered in turn for participation and for how long the government will hold onto the equity stakes."

Reading all this, the question that quickly comes to mind is, "why would healthy banks even need such a rescue from the government?". Would any truly sound bank ever find itself in need of a government-directed (and taxpayer-funded) recapitalization?

With this latest move to take ownership stakes in the banks, it seems the US Treasury is stepping in to take the place of the Sovereign Wealth Funds (SWFs), many of whom have taken big hits on their recently soured investments in Western banks.

Now that the SWFs are smarting from those earlier investments, it seems the US and European governments think they will succeed where the others have failed. We'll see about that one...

Popular posts from this blog

Nasdaq credit rating junked.

S&P cut Nasdaq's credit rating to junk status citing debt burdens and its questionable strategy to buy a controlling interest in the London Stock Exchange. Financial Times reported that the exchange's counterparty credit & bank loan rating were lowered fromm BBB- (lowest investment grade rating) to BB+. The change will increase Nasdaq's borrowing costs should it wish to pursue aquisition targets. For an earlier look at the exchange consolidation trend that brought about Nasdaq's push for a stake in the LSE, please see "Exchange fever" .

Jesse Livermore: How to Trade in Stocks (1940 Ed. E-book)

If you've been around markets for any length of time, you've probably heard of 20th century supertrader, Jesse Livermore . Today we're highlighting his rare 1940 work, How to Trade in Stocks (ebook, pdf). But first, a brief overview of Livermore's life and trading career (bio from Jesse Livermore's Wikipedia entry). "During his lifetime, Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes. Apart from his success as a securities speculator, Livermore left traders a working philosophy for trading securities that emphasizes increasing the size of one's position as it goes in the right direction and cutting losses quickly. Ironically, Livermore sometimes did not follow his rules strictly. He claimed that lack of adherence to his own rules was the main reason for his losses after making his 1907 and...

Finance Trends 2019 Mid-Year Markets Review

Email subscribers of the Finance Trends Newsletter receive the first look at new articles and market updates, such as the following piece, sent out to our email list on Sunday (6/14).   Hello and welcome, everyone! If you received our last email notice over the July 4th holiday, you'll know that this weekend's newsletter will serve as a mid-year market update and a follow-up to issue #29, " How to Reinvest in a Rising Market ".   Ladies and gentlemen, without further ado, let's start the show...  Finance Trends Newsletter: Our Mid-Year Market Review When we last spoke, back in February, the U.S. stock market was rallying off its December-January lows. As the S&P 500 and Nasdaq reclaimed their 200 day moving averages in February and March, it became increasingly apparent that a lot of retail investors (and perhaps some institutional investors) were left under-invested while watching this recovery move from the sidelines.  The U.S. stock ...