Guess the continuing deterioration in the stock market is beginning to capture the attention of the financial regulators. The Treasury, FDIC, OCC, OTS, and Federal Reserve issued a joint statement just after 4:00 PM (hat tip reader Steve). Some key bits (boldface ours);
A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery. The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.
Yves here. Rather amusing. The first sentence basically says the US needs a healthy banking system to start growing again, the second acknowledges it is on life support. We are still waiting for details on how the government “will ensure” that things will be OK. The fourth sentence is a “no more Lehmans” promise. Back to the piece:
We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment.
Yves here. Translation: “We have a program, why are you guys so anxious?” Back to the announcment:
Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital.
Yves here. Who do they think the audience for this is, morons? These banks have been desperately trying to raise equity, the last successful party was Goldman on rather punitive terms (the Buffet preferred stock also had very rich conversion rights). Sovereign wealth funds aren’t buying and TPG got burned on WaMu. And then Paulson gave much better deal than the least sick looking bank, Goldman, was able to extract. But you are seriously trying to tell us there might be private capital for banks at anything other than confiscatory terms? Back to the release:
Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers.
Yves here. This wrinkle is new. So the powers that be are going to temporarily overcapitalize the banks, and pretend it is merely undue caution, rather than the required amount expected to cover unearthed or likely to be realized near term losses. Charming. More details:
Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares. The conversion feature will enable institutions to maintain or enhance the quality of their capital.
Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized…
Yves here. Yes, that’s how we got in this mess. The standards are inadequate given the risks these firms were taking. Pretty much no one in the private sector (except bank management on their more delusional moments) believes the large US banks have enough equity. Back to the release:
Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.
Yves again. The boldface verges on comedy. The financial firms HAVEN”T been well managed, but evidently you’ve been asleep for the past six plus years. And there is no acknowledgment of what you intend to do about deficient private management, save throw more money at it, which does not sound reassuring.
The markets want action, not more words, I doubt anyone with an operating brain cell will take much comfort from this.