Once again, the "will of the people" was overridden by Congress in their haste to respond to an "emergency," and, once again, it turns out the people’s instincts were right.
Remember the initial $250 billion that was going to be used to buy troubled assets which "we had to do right away!" because otherwise there would have been untold misery and millions of jobs lost?
Turns out we don’t need to buy any of those assets right away after all.
Who knew?
[quote]WASHINGTON — The Treasury Department, in its boldest move yet, is expected to announce a plan Tuesday to invest up to $250 billion in large and small banks, according to officials. The United States is also expected to guarantee new debt issued by banks for a period of three years, officials said.[/quote]
Instead, the money will be used to buy bank stock, which is a great deal if you are a bank, because you get cash equity and probably a nice boost to your stock price (I am cynically assuming that the government is not going to get the best price here….). And these purchases will be non-dilutive to existing shareholders. I was okay with the notion of capital infusions, but I am astounded to hear that they will be done in this manner to save existing shareholders.
Even more startling to me is that, instead of slapping the banks firmly on the wrist for being reckless, the government is also "expected to guarantee new debt issued by banks for a period of three years." To put it bluntly, that is just not the way to combat the moral hazard that is clearly endemic to our current banking system. I think the banks should be kept fully on the hook for any loans they make from here on out….mess up again, and your institution goes under.
Next, if you read the list of handouts below, things get even more troublesome (if your measure is "enormous rewards for Wall Street for misbehaving bother me").
Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.
A few of those companies are not even in trouble, at all, and yet they are about to receive billions and billions of dollars. Apparently there is a $5 billion reward for acquiring a competitor….I wonder how many knew about that when they were at the bargaining table? I would bet quite a few of them.
Wait, it get’s better:
The goal is to inject massive liquidity into the banking system. The government will purchase perpetual preferred shares in all the largest U.S. banking companies. The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.
First, this is NOT a liquidity injection, this is a capital injection, and there’s a big difference. Second, this deal could not possibly be any sweeter for any of the bankers or their shareholders. It amounts to a gigantic reward for playing risky and getting caught. Executive positions and shareholders are to be spared.
I am now squinting anew at the market sell-off last week, because it served to inject a lot of fear into the government and G7 negotiations at a critical moment that paved the way for the largest and most massive bailout ever in history. Strangely good timing, for the banks.
I called this a looting operation at the outset, and my suspicions are now largely confirmed.
After these trillions of dollars have been spent and distributed to the least worthy institutions on the planet, you will discover a few oddities along the way:
- Government debts will balloon enormously.
- No new jobs will be created.
- House prices will continue to fall and foreclosures will continue to mount.
- The real economy will have received practically zero benefit.
- Bridges, roads, and schools will still be in poor repair.
- States will still be hurting for revenues.
- We will still have no national energy plan.
In short, none of this money is directed at the real economy. All of it is directed at the institutions that created this mess in the first place, and which, honestly, feast on the productive economy.
This was, quite simply, the largest-ever transfer of public monies to private parties with the least amount of public gain.
We’re going to be paying for this for a long, long time.
Oh, well, I suppose it is all history now. Time to sit back and see how the bond markets respond to all this new borrowing.
by jgreco