Thursday, October 16, 2008

Paulson's $250 Billion Bank Buy

Paulsons $250 Billion Bank Buy

U.S. Treasury Secretary Henry Paulson announced a deal on the next stage of the massive package to rescue the financial sector and get the frozen credit markets working again on Tuesday, Oct 14. The announcement came the day after Paulson called in the heads of six major banks and pressed them to "voluntarily" back Treasury's plan to devote $250 billion of the $700 billion recently approved by Congress to buy direct equity stakes in financial institutions in return for senior preferred shares.

At a press conference in the Treasury's ornate Cash Room, Paulson announced that nine large financial institutions "have already agreed to participate in the program." The agency plans to use half of the $250 billion to buy preferred shares simultaneously in a handful of the country's largest banks, according to a source closely following the discussions. This source expects the rest of the $250 billion—which is the amount of the first tranche Congress authorized Treasury to spend—to be invested quickly in other banks. After that, Treasury would ask Congress to authorize the next $100 billion in funding it approved.

Paulson said banks that sell shares to the government will "accept restrictions" on executive compensation, including a ban on golden parachute exit agreements while the government holds the bank shares. Taxpayers will also get warrants for common shares. And the banks will be expected to "continue and to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure."

"Our goal is to see a wide array of healthy institutions sell preferred shares to the Treasury, and raise additional private capital, so that they can make more loans to businesses and consumers across the nation," Paulson said in the statement. "At a time when events naturally make even the most daring investors more risk-averse, the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it."

Who's Getting What

Among the firms expected to get funding: JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) were to receive $25 billion apiece; Wells Fargo (WFC) was to get between $20 billion and $25 billion; Goldman Sachs (GS) and Morgan Stanley (MS) were down for $10 billion each, and the Bank of New York (BK) and State Street (STT) were slated for $2 billion to $3 billion apiece. A spokesperson for Citigroup declined to comment, as did one for Goldman Sachs. The other banks could not be reached for comment.

The move, intended to help recapitalize the troubled sector, was widely anticipated by the markets and helped fuel Monday's historic stock surge. Paulson, FDIC Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke, outlined the program's details at a press conference. The program is expected to be run jointly by all three agencies. It will be available to a wide array of financial institutions and who ask for the government infusion by November 14.

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