The Treasury did not ask several of the nation's largest banks and investment houses whether they wanted new capital. It told them. So weak banks got money and so did strong ones.
According to Reuters, "The United States will announce plans on Tuesday to inject $250 billion into its banks." Money will go in as preferred stock so common shareholders will not be diluted, unless one of the banks comes close to failure. But, JP Morgan (NYSE: JPM) is being forced to take the same $25 billion that Citigroup (NYSE: C) is. Goldman Sachs (NYSE: GS) and Morgan Stanly (NYSE: MS) will each have to take $10 billion.
The plan is ill-conceived and unfair when the more healthy firms like JPM and Goldman have to take on the same debt burden as weaker competitors. Treasury might argue that it does not have time to make these distinctions, but critical measures like reserves and earnings might have been taken into account. The Treasury might also have told the CEOs of the companies that if everyone did not take capital that full confidence in the system could not be restored.
Unfortunately, the action by the government shows that its work will be done with a hammer and not a scalpel. Over time, this may have very significant drawbacks. There are limited funds to be put to work. Why waste them on the healthy institutions?
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
10-14-2008 @ 5:52AM
al coholic said...
Hey, just a few weeks ago they were all supposed to be "healthy." Who the hell knows anymore?
10-14-2008 @ 8:39AM
kjordan944 said...
This is classic PROPAGANDA!
Of course the government is putting this message out there of having to 'force it down the bank's throats' when it would be deemed severe moral hazard, favoritism, etc... if the banks asked for the money.