pai mei, that's a topic to expand on and use as another thread.
Bloomberg.com: Worldwide
Quote:
U.S. to Get Bank Ownership Stakes Only as Losses Rise (Update1)
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By Craig Torres
Feb. 24 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the U.S. government’s bank-capitalization plan is designed to shore up lenders’ common equity only if the economy worsens and creates more losses for financial institutions.
The Treasury will buy convertible preferred stock as needed in the 19 largest U.S. banks after stress tests to determine how much capital is needed to address losses in a “worse” case scenario, Bernanke told lawmakers at a Senate Banking Committee hearing today. The shares will be converted to common only as the extraordinary losses happen, he said.
“It doesn’t have an ownership implication until such time as those losses which are forecast in the bad scenario actually occur,” the Fed chief said. He also rejected the idea that the stress tests are a pretext for nationalizing banks, saying, “I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary.”
Bernanke’s remarks eased concern among some investors that the Treasury’s capital-injection plan will hurt banks’ shareholders and lead to government takeovers of lenders. The Standard & Poor’s 500 Banks Index climbed 10 percent, the most in more than two weeks.
Majority Ownership
“We don’t need majority ownership to work with the banks,” Bernanke said today. “We have very strong supervisory oversight. We can work with them now to do whatever is necessary.”
The chairman added that it will be up to Treasury Secretary Timothy Geithner and the Obama administration to determine whether more bailout funds will be needed from Congress.
“How much more we’ll have to do depends on the state of the banks, it depends on how the economy evolves and it depends on the margin of safety we think we want to have,” Bernanke said today. He separately warned that “if we don’t stabilize the financial system, we’re going to founder for some time.”
Bernanke also said the so-called stress tests that regulators will run on the 19 banks will look at potential losses over a two-year horizon if the economy worsens.
The stress tests “will look at the balance sheets and the capital needs of each of our 19 largest $100-billion-dollar-plus banks over the next two-year horizon,” Bernanke said in response to a question from Senator Robert Corker, a Tennessee Republican.
Economic Scenarios
The assessment will use “both a consensus forecast -- where we think the economy is likely to be based on private sector forecasts -- and an alternative which is worse,” Bernanke said.
In his semiannual testimony on the economy to Congress today, the Fed chief warned that the recession may last into 2010 unless policy makers can stabilize the financial system.
The economic forecasts Fed officials prepared in January suggest that “a full recovery of the economy from the current recession is likely to take more than two or three years,” Bernanke said.
A private survey today showed that confidence among U.S. consumers sank to a record low in February. The Conference Board’s index declined more than forecast to 25 this month, the lowest level since data began in 1967, the New York-based research group said today.
Bernanke urged “strong” action by policy makers. The message comes as the Obama administration works on fleshing out the details of its bank-rescue plan. Financial stocks had slumped further since Geithner unveiled his outline Feb. 10, amid concern a lack of details and worries over the ultimate intention of the approach.
Citigroup Talks
Officials have also opened talks with Citigroup Inc. about providing further help to the lender after the company’s share price dropped to as low as $1.61 four days ago. It was at $2.43 at 1:53 p.m. in New York.
Along with a new round of capital injections, Geithner’s strategy includes creating public-private partnerships to purchase toxic assets weighing down banks’ balance sheets, and a $1 trillion program to restart the markets for securities backed by consumer and business loans.
The purpose of the stress tests on banks isn’t to provide a “pass” or “fail” grade, Bernanke said today. Instead, the government wants to ensure that firms can meet their obligation to lend even if the economy worsens, he said.
‘Sufficient’ Equity
“The bank could convert the preferred to common to make sure that it has sufficient common equity, and only at that time, going forward, if those losses do occur, would the ownership implications become relevant,” Bernanke said.
Treasury officials are expected to provide further information about the stress tests tomorrow.
Regulators won’t let banks “hide anything” as they look at how lenders have valued their assets, and will ensure that firms are using “appropriate models” for mark-to-market accounting, Bernanke said.
“We’re going to do a tough evaluation,” the central banker said in response to a question from Senator Richard Shelby of Alabama, the Senate panel’s ranking Republican.
Bernanke took issue with some observers’ characterization of major U.S. banks as “zombie” firms, kept alive only through access to federal programs. They have “substantial franchise value,” he said.
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.
Last Updated: February 24, 2009 14:11 EST
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So, folks, there are 19 banks that the administration believe are going to need massive, ongoing, regular bailouts (until they eventually fail). Oh, and "If everything goes our way and the world magics itself into a new state of utopia" then the economy will start to pick up towards the end of this year.
"substantial franchise value" as the only reason to keep those entities limping along?
That whole deposition was a joke and Bernanke knows it.
Every indicator is heading through the floor, credit supplies are still drying up, margin calls are still ongoing. Not just in the US, but worldwide.
If they go through with this, then the V shape recession Bernanake is talking about is out of the question, with U shape recession or an L shape recession both equally likely I think.
All. Of. The. Banks. Are. Dead.
US. UK. Euroland. Asia.
ALL.
The necromancy to keep them alive with ever expanding bailouts, insurance coverage, guarantees, shotgun weddings with dowries, etc, etc... are only going to suck all life out of whatever is left of the western and eastern economies until those damn banks, financiers and distressed corporations all fail, through either bankruptcy or nationalisation.
"The United States can be relied upon to do the right thing, only once it has tried every other option." - Whisky-Sodden Imperialist Relic.
The rest of the world too, I hope, Mr Churchill. The last solution to this sort of global problem is now not an option.
Can you believe this stuff? Does anyone out there swallow this nonsense?
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As an aside, what this effectively does is hitch the state and therefore the people (as the UK has also) to specific corporate, mainly banking interests. The merging of corporate and state power.
*gulp*
At least if they were nationalised and reformed, the damn shareholders could be wiped out, with as much incompetent management kicked out as possible, as much bad debt written off as possible and the system reset to a certain degree...
Urgh... this is insane.