The Homa Files

Excerpted from WSJ: “‘Distasteful’ Capital”, Oct. 15, 2008

* * * * * 

The government’s rescue plan moved into a new phase with the announcement that Treasury is injecting $125 billion into the country’s nine largest banks  … as much as $25 billion each for the biggest. Another $125 billion is on the table for other banks that need capital on the same terms offered to the big boys.

Despite the risks, directly recapitalizing the banks is likely to prove a better tool than buying up “troubled assets.” 

Giving banks this additional capital cushion should give them some leeway to sell those assets at market prices without risking insolvency. At the same time, it avoids the vexing problem of how to price securities that the smartest minds in finance are having trouble assigning a value to.

And unlike buying dodgy mortgage paper, recapitalizing banks is something the government has done before and knows how to do, more or less. The FDIC has done so from time to time via open-bank interventions, and the Depression-era Reconstruction Finance Corp. recapitalized thousands of banks in the 1930s.

Under the program, banks that participate will pay 5% interest annually on nonvoting, senior preferred shares issued to Treasury. Treasury will also receive warrants to buy bank stock at the market price at the time of the capital injection. The warrants, equal to 15% of the face value of the preferred shares issued by the bank, offer some possibility of profit for the Treasury without being so dilutive to existing shareholders as to scare away private capital.

* * * * *

Full article:
http://online.wsj.com/article/SB122402721776634391.html

* * * * *

Want more from the Homa Files?
Click link =>  The Homa Files Blog

This entry was posted on October 15, 2008 at 8:41 am and is filed under Financial Crisis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.