The Deal

by on October 13, 2008 at 8:52 pm in Current Affairs | Permalink

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion; Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York and State Street each receiving $2 to 3 billion. Wells Fargo will get an additional $5 billion, reflecting its acquisition of Wachovia, and Bank of America receives the same for amount for its purchase of Merrill Lynch.

…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…executives, because
perpetual preferred stock holders are paid a dividend, not a portion of
earnings. The capital injections are not voluntary, with Mr.
Paulson making it clear this was a one-time offer that everyone at the
meeting should accept.

Here is the story.  No matter what your point of view, you ought to be stunned by this development.

Addendum: Brad DeLong adds musical commentary.

Mercutio.Mont October 13, 2008 at 9:05 pm

“Not voluntary.”

Wow.

scim October 13, 2008 at 9:15 pm

Sounds like the kind of deal you’d get from a mobster. The ones without scruples, not the TV kind.

Gary October 13, 2008 at 9:16 pm

Forced “injections” of money is hardly an investment.

The government can’t resist new toys. Despite any promises of non-interference, any body which took time in a one of the largest financial crises of the last century to put in a clause for wooden arrows, will certainly want to influence banks for political ends at some point in the future. They’ve done it without ownership, there is no reason to believe this will dissipate with ownership.

Andrew October 13, 2008 at 9:19 pm

I’m citing the Social Security trust fund being invested in Treasuries. Obviously they are a net liability, but we do have investment funds in gov’t.

ANON October 13, 2008 at 9:47 pm

Of course they are dillutive — dividend payments reduce net earnings.

Matt October 13, 2008 at 9:54 pm

Why should I be stunned by this? I don’t really understand. Explanation?

zbicyclist October 13, 2008 at 10:03 pm

How does this force liquidity? [in the sense of "Main Street" being able to get loans?]

(Oh, and how much dividend does it pay? Isn’t that an important detail missing from the story?)

MHodak October 13, 2008 at 10:18 pm

So, this was an offer they couldn’t refuse.

And we’re ragging on what Putin’s crowd is doing in Russia?

gabe October 13, 2008 at 10:22 pm

(Oh, and how much dividend does it pay? Isn’t that an important detail missing from the story?)

No it is not important. Your not getting anything so don’t even ask.

Anonymous October 13, 2008 at 10:30 pm

It is most unfortunate that we do not have a strong President who understands economics and has the confidence of the people. In a sense Mr. Bush is to blame for the current bad situation and the worse remedy now being put into place -in the way a weak and ineffectual police force is to blame for crime. It seems likely, barring a miracle, that we are about to get something worse -a President whose understanding is wrong, being nothing more than a bunch of left-wing ideas which make no sense: “Spread around the wealth,” etc.

Anonymous October 13, 2008 at 10:44 pm

It is highly unfortunate that we lack a President at this time. (“Forgotten but not gone.”) We desperately need someone who understands economics, is articulate, and has the confidence of the people. In a way Mr Bush is responsible for the current situation and the coming “solution.” -in the same way that a weak ineffective police force can be said to be responsible for crime. The transfer of wealth resulting from this “solution” will be highly regressive and if it helps produce an Obama victory will probably result in all sorts of enduring damage to the economy

Robert Olson October 13, 2008 at 11:09 pm

Nothing surprises me anymore

psychohistorian October 13, 2008 at 11:16 pm

What sort of voodoo economic theory does this deal originate from?

So why wasn’t the money used to establish new clean banks with this money under new rules that insured that, once again, prudence is adhered to. Why are the folks that caused the problem being handed all this more money and the rules are not being changed?

Where is my share? I want an amoral federal tit to suck on.

Christopher RAsch October 13, 2008 at 11:18 pm

Stunned? Why should we be stunned? What’s the huge conceptual jump between giving banks hundreds of billions in subsidies, and demanding a piece of their equity in return?

Chris Rasch October 13, 2008 at 11:22 pm

Gah. Sorry for the dupes.

Sprizouse October 13, 2008 at 11:25 pm

Paulson is loyal to his banking buddies to the last ain’t he? Instead of taking common stock that would give the Treasury a major upside, he takes perpetual preferred stock which might fall in price and remain low forever.
He could have taken a mix or put in some voting rights, but whatever… the important thing, really, is that it’s done and hopefully banking confidence will be averted. The DTCC says Lehman’s counterparty defaults on its CDS’s at the auction will be only $6 billion (much less than the $400 billion estimates). If so, then banking confidence could be returned in full by December (just in time for holiday shopping!!!)

Kristina Brooker October 13, 2008 at 11:27 pm

Since “the news” has made a predictable error my
question is what do you think my “penis position opinion” is,
since with ever opinion the people effecting directions will
check my virile. You’ll find I’m number one.
Their are two groups of people you take opinions with, those that
effect and check your class expectations and those your class place
can be determined by the types of statements you have to say to
be expensive.

The point of checking virile is it determines your personal comfort
best which is the best way to be expensive. Given the point of this
economy is to follow the rule of,

Economic Profit:As much money as fast as possible or as long as
possible.

Such games include:
-my sex life affecting your employment, leading to jail finding you…
-women getting directions about work, approved by a male owner
-female payment due to no financial opinion happening through ridicule
-teenagers fitting into class expectation
-drug dealers controlling classing through tv
-the FBI not having a reason to to anything so coming up with
problems for work such as deturing communism.
-problems for the sake of problems for the reaction to keep fitting
class expectation so economic profit increases.
-Problems so that the reaction is “I don’t understand”

Of course their are exceptions it depends on comfort.

Sprizouse October 13, 2008 at 11:45 pm

@ Bob Murphy — The capital injections are not voluntary, with Mr. Paulson making it clear this was a one-time offer that everyone at the meeting should accept.

What does that even mean? Is it like the IRS telling me I should accept my tax liability? Tyler, what does this signal? :)

Bob, it had to be done this way. If the banks came voluntarily to ask for money it would signal weakness. In case you haven’t noticed, any sign of weakness by a bank in the current climate has been severely punished. Morgan Stanley had their share price pummeled on Friday when rumors went around that the Mitsubishi UFJ deal wasn’t going through (and MS’s share price was punished without the ability to short financial stocks).

So the major banks had to be forced to collectively take it all at once. Since it doesn’t look like he’s spent the whole $250 billion, I imagine Paulson will do the same with some smaller banks in the coming week.

Amicus October 13, 2008 at 11:57 pm

It’s … beyond ludicrous. I’m speechless.

I did notice that the “Hope Now Alliance” didn’t get invited to the meeting with Paulson.

Oh, the humanity. Why, it was just a few weeks ago that Newt Gingrich was affirm that America’s best days lay ahead of her, and that Fareed Zakaria was unpatriotic.

I’ve used zazzle to order up an “I LOVE MY AIG!” t-shirt and button.

Paludicola October 14, 2008 at 12:44 am

My generation may well be arguing about this when we are all old men and the young’uns have done something at least as foolish in the meantime. This is far from the abetting to creative destruction to eliminate hopeless banks that I thought was the best way to avoid just jerking around with a limp financial sector for a long time; turning Japanese, so to speak.

Was Kristina Brooker presenting opinions or avant garde poetry?

Roger Chittum October 14, 2008 at 1:13 am

The banks love this because Treasury’s investment is really cheap–5-9% preferred dividend is hardly half what Warren Buffet is getting from Goldman, and the warrants are eyewash. I didn’t see anything about executive compensation, but I’m sure nobody thought the law was serious about that anyway.

A perverse effect is that needy banks will not accept more costly capital at market prices from private sources until they’re certain Treasury won’t put in the cheap stuff. And private players will require assurance that they won’t be undercut by Treasury.

apostate October 14, 2008 at 2:30 am

So what percentage of this payout is coming back as campaign contributions?

Slocum October 14, 2008 at 5:36 am

On the other hand, the apparent fact that some banks did not want to take it is a mildly encouraging signal about the terms of the deal.

I suspect maybe it was intended as a way of avoiding a signal — a bank voluntarily signing up would have signaled that it was in more trouble than competitors who turned down the deal. Making it not really voluntary provided cover for all.

londenio October 14, 2008 at 7:28 am

The probability of Kristina Brooker not being an actual human being but a rant-generating algorithm (a good one!) is less than .99

meter October 14, 2008 at 8:43 am

Way to play hardball, Hank, and make them take our money…that’ll show those irresponsible banks!

Ostrich October 14, 2008 at 9:25 am

Here’s a question. If we do what Charlie Munger wants, and essentially wipe out the hedge fund operations of investment banks (such a good idea), does that $25 billion investment in Goldman, MS and Merrill Lynch (via B of A) become worthless? In other words, why are we doing this?

Superheater October 14, 2008 at 12:10 pm

“because perpetual preferred stock holders are paid a dividend, not a portion of earnings.”

So if its not coming from earnings, where does the dividend (on the perpetual preferred stockcome from?

Wow. We are stupid, we simply fail to appreciate our benevelonent governments miraculous financial alchemy.

The Dirty Mac October 14, 2008 at 10:40 pm

With the Democrats coming back into power, are there going to be any good no show union jobs available at any of these banks?

buy cabal alz January 1, 2009 at 9:48 pm

If you have to buy cabal alz, please come to our company.

nancy May 14, 2009 at 2:01 am

this is a good topic

Kristina Brooker June 30, 2009 at 10:32 am

“The intentional error”

People who are in media are a business and they have this
pattern of statement; they realize the error in the statement,
and know all the possible responses.

For example: Lets complain about the new addition to your
household electricity system, the smartmeter. Lets make the
complaint: “I expect a backstop for this product.” or “I expect
this product to improve and both versions worth the investment.”

(If you don’t know “backstop” means replacing a product because
of environmental improvement.)

The company knows the responses, they are accepting criticism in
this way:

The initial consumer ranking game is “comfortable marriage”

1) Who is your assigned male?
2) Explain why he was employable?
3) Does your memory indicate that your finances want to fit in?
4) Are you changing the system?

The purpose of ranking consumers though marriage-ability is the
next obviously important “personal comfort”. Personal comfort
is obviously important to pricing, the economic lingo that is
usually used in it’s place is happiness or satisfaction. I
really want to point out that the consumer ranks those
qualities arbitrarily, it is your personal taste, style,
attitude, your cool, that you fit in the same as years ago.

Personal comfort is exactly why their are twenty times the number
of raw resources that go into a car vs. a computer, yet the pricing
is what the consumer will pay for comfort or satisfaction.

So who’s “personal comfort” changes the company, by setting
consumer trends, changing prices, effecting shares changing the
CEO. The people who at the same time claim approval of a respected
male income.

The fact that the person running the business changes but follows
the same systematic conversation running the company, indicates
their is simply a pattern to running a company, they change the
company like most other consumers, they simply bring their
“marriage comfort” hence “personal comfort” for the consumers
preference, relating to the important consumers preemptively.

So is my only response to media, “dad had a perfect death”.

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