US Bank Recapitalization: Waiting for Kashkari

The US stock market soared upward today, partly on the announcements by every major European country that they will be protecting their banking sectors, but largely on the expectation that the US will take similar measures – namely, bank recapitalization and loan guarantees – in the next couple of days. A fair amount of attention was drawn to the following statement by Neel Kashkari this morning:

4) Equity purchase program: We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capital.

However, a couple things should be pointed out. First, this was #4 out of 7 initiatives that Kashkari’s team is working on, including buying mortgage-backed securities, buying whole mortgages, insuring MBS, etc. So as I said on WNYC this afternoon (clip may not be up yet), this isn’t really new information. Second, the program is voluntary. This means that bank shareholders can take it or leave it; if they don’t like the terms the government is offering, they can choose to stay out on the thin ice and hope it doesn’t break. I’m not saying the government should be forcibly nationalizing banks, but this does raise a potential issue. Third, it is designed only for “healthy institutions,” which raises the question of who is healthy today. Perhaps the idea is to shore up a few major banks and let them buy up assets from the others – a plausible strategy – but it isn’t clear.

Luckily, word is that something will be announced tomorrow, so we won’t have long to wait. If you get any early leaks, please share.

2 thoughts on “US Bank Recapitalization: Waiting for Kashkari

  1. News on Bloomberg is saying “None of nine banks getting government money was given a choice about it”. Seeing as the US will own a piece of every major financial institution in the US will it also mean that the payoff could be huge? Could profits from this program be used to pay down the national debt?

  2. I think we still don’t have the details we need to answer that question. Based on what I have read, I think the government is getting permanent preferred shares which pay a dividend but are not convertible to common stock – which means that the government does not benefit from any appreciation in bank share prices. Assuming the banks stay in business the government should get a nice return on those preferred shares, though. Buffett is getting 10% from Goldman and the UK is getting 12% from RBS.

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