Tuesday, October 14, 2008

Paulson's $250 Billion Bank Investment

Nine of America's largest banks have a new shareholder, Uncle Sam. Treasury announced a plan to buy $250 billion of senior preferred, nonvoting shares. It will also take warrants amounting to 15% of the preferred investment. Highlights include:

1. Dividends will continue to be paid to existing preferred and common shareholders
2. New senior secured debt issued by bank will be guaranteed by Uncle Sam for three years
3. Extend FDIC deposit coverage to all small business accounts, i.e. no limit
4. Banks must deploy capital via lending

It looks like credit can move again. Morgan Stanley's credit default swaps fell to 3.75% this morning. A year's coverage soared to 26% last Thursday. Hank Paulson hit the panic button when it hit 9% the week of September 15.

The toxic asset repurchase plan continues forward. Large non banks, like GMAC and GE Capital, hold nonperforming assets. So do insurance companies. How much equity will Uncle Sam eventually own?