Last evening on NQR’s Sense on Cents with LD, I proposed that the Obama administration would not release individual results of the Bank Stress Tests. I further added that I thought the administration may encourage stronger banking institutions to channel funds to weaker institutions. In so doing, these stronger banks – such as JP Morgan and Goldman Sachs – may actually take equity stakes in the weaker banks. Will JP Morgan and Goldman bear the entire risk of those equity stakes? Doubtful. Uncle Sam will likely negotiate terms along the lines of other bank bailouts in which a strong bank provides capital but the government bears the brunt of the losses.

As I write this, Bloomberg reports Bank of America is speculated to need another $10-20 billion in equity capital. BofA’s earnings were reported this morning at .44 earnings per share versus an expectation of approximately .03 earnings per share. Analysts are panning the earnings due to the propsects for ongoing increases in credit losses within BofA’s loan portfolio. BofA’s stock is down approximately 8% in early trading.

If BofA does need another $10-$20 billion in equity capital, where might it come from? In my opinion, in a non-public transferral of capital, those funds may come from JP Morgan and/or Goldman Sachs, and would actually be recycled TARP funds. Effectively, JPM and GS will merely be a conduit for increased government funds injected into BofA and Citigroup, as well. Remember JPM has $25 billion in TARP funds, Goldman has $10 billion. If BofA took $15 billion of these funds then Citi could receive $20 billion. What would JPM and GS receive in return? I would think these negotiations would be private and not released, although given that the capital provided is public money all information should be released.

The administration has released word that the focus of the Bank Stress Tests will be on the industry as a whole and not individual institutions. The FT reports, U.S. to Put Conditions on TARP Repayment. What are the conditions?

Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.

“Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.”

His comments come as Goldman Sachs, JPMorgan Chase and other relatively strong banks are pressing to be allowed to repay their bail-out funds. On Sunday, Lawrence Summers, President Barack Obama’s top economic adviser, told NBC’s Meet the Press that repayments could eventually help the government provide further resources to help the sector. Such a move could also allow healthier institutions to differentiate themselves from weaker banks and free them from constraints on executive pay, and other activities, that come with bail-out money.

The most restrictive covenant of holding TARP funds centers on compensation limits. How JPM and GS negotiate their way out of that noose is the big carrot for playing ball with Uncle Sam.

We also should not forget that every banking institution on Wall Street has issued FDIC-backed debt. That support has allowed the banks to save themselves 3-4% on the cost of funds and is another version of the private profit vs. public risk scenario.

Despite statements from Obama and team, the political game plan of buying time and spreading the banking risks across the taxpaying public is in place. I do not see that changing at this juncture. The “games” being played via the Bank Stress Tests will likely be another version of Games of Chance: TALF, PPIP, TARP, FDIC, FASB.

LD

  • TeakwoodKite

    LD, you explain this so well. As I am unable to ask questions with specificity,(a financial pleb) this is what I was attempting ask. Thanks you.

    You site is invaluable resource.

  • spread the wealth..socialism is here

  • jeremy

    goldman sachs was a investment bank but became a bank holding company aka street corner bank to get tarp funds. hope that answer ur question

  • Ellen D

    Not being a real financial person, I have a few questions. If anyone can answer them, I would appreciate it.

    1- Why do people refer to Goldman Sachs as a bank? Morgan Chase is on the corner of my street but where is Goldman Sachs?

    2- People talk about banks bundling mortgages together into securities and selling shares in these securities. But mortgages aren’t static – people sell houses and new mortgages are taken out. Mortgages are paid down. What is the mechanism for keeping track of the nuts and bolts of a security fund dealing in a constantly shifting commodity? Are there reporting laws regulating these securities? If there is no reporting requirement, what idiot would buy into them?
    Could someone explain to me how this was supposed to work?

  • panjoe

    LD

    This is a long post but I found it on a finance message board and would like your thoughts on it.

    Thanks

    I’m a business diagnostician. I’ve been one for over 30 years. If a business listens to my suggestions they prosper. I’m retired now and have been studying the downfall of America recently. This really doesn’t have to happen and it is preventable, but we have several problems that have to be addressed very soon. You can call this a Christmas wish list if you like, and can even cut-and-paste these suggestions and e-mail them to your gov’t rep of choice and demand he/she act on them a.s.a.p. 1. Quit throwing money at the big banks. They’ve cooked the books and they’re not truthfully revealing the shape they’re in. Actually the money given them is used for bonuses, buying other banks, sending money to foreign banks, and hiring more lawyers for foreclosures. They are only lending to someone with a great credit rating. One at a time, the banks should be nationalized, their books cleared up, their CEOs fired, then finally break up and sell each bank into smaller (not too big to fail) pieces to the private sector. 2. To restore confidence in our financial system and bring people back to the stock market – these institutions, along with Fannie and Freddie, the SEC, and several representatives in government have to be investigated for wrongdoing. An example must be set and our government has to show they are serious about cleaning up all of the corruption. 3. The laws pertaining to the banks and lending must be changed very soon. Over the past decades the laws have been omitted or adjusted to heavily favor big business and what they can do. Some executives in certain institutions have been empowered to just write their own paycheck. We’ve changed from a democracy into an oligarghy, ruled and controlled indirectly by the super-wealthy. Some suggest they’ve seen Obama (and countless others) at the Bilderberg meetings. 4. Outlaw lobbyists. The last time I checked, our elected officials are to represent the people of America, not institutions, organizations or their own special interests. 5. Enforce the immigration laws that are on the books. I know Obama is pushing amnesty now but I figure it’s just lip service and he’s just looking for the votes in 2012 and realizes amnesty will have no chance of being passed at this time. Face it, America is really really hurting for jobs right now and to add to this problem would not be a good thing. In addition the illegals are a very large burden to several states now and becoming worse. 6. Do away with the h-1b workers. Again, legislation passed by our reps making it just fine to import more workers here, while our workers get a lay-off slip. Bill Gates, just how much money is enough ? 7. Get the hell out of the middle east countries. They don’t want us there. We’re just stirring the pot. This is just one more reason why the terrorists want to kill us. Good luck making peace there when their peoples have fought each other for centuries. 8. Legalize pot. Just pot. The war on drugs is lost. This is just like prohibition. Legalize it, monitor it, and tax it. This will soften the war against the Mexican drug cartels as well. Pot is a soft drug and is non-addicting (don’t believe what your gov’t tells you). 9. Go after the off-shore banks, British Virgin Islands and Swiss banks as they just horde ill-gotten money for the rich and illegal (and America desperately needs the revenue now). 10. Pass legislation to lower these ungodly credit card rates (see lobbyist). I think it’s funny how Bush pushed through legislation making it tougher to declare personal bankruptcy before the end of his term. He’s just taking care of the good ‘ol boys. Greed is a disease. The more you have the more you want. I don’t see it though. You’re very rich, and you screw over the whole country and world economy to become very very rich. 11. Colleges – halve the tuition for American kids, while doubling it for foreigners. It’s a damn shame we have the finest colleges in the world and our own children can not take advantage of that. We’ve fallen desperately behind the world in education and this should help. 12. Corporations – all money going to R & D won’t be taxed. 13. Get rid of NAFTA. Did you notice the price of your new Ford drop dramatically when they started making them in Mexico ? No ? Hmmm you know that dropped the labor cost to almost nothing. With the savings a new Focus should cost $3000. Somebody’s getting richer (see lobbyist). Thanks for signing NAFTA Bill Clinton. I knew you weren’t a democrat when you did that. Let’s get busy people and TAKE BACK OUR COUNTRY !!!!!

    • Peggy Sue

      Excellent recommendations, panjoe. I think what’s going on right now is absolutely disgraceful. We are and have been rewarding corruption and deceit to the point where the country is in absolute peril. It goes across party lines. Obama is just the most recent manifestation [or should I say infestation]. The honest brokers in government and business need stand up and scream their lungs out. And the press needs to get off its well-groomed butt and stop being a lapdog to the powers that be.

      Otherwise we’re as cooked as the books.

    • TeakwoodKite

      Some suggest they’ve seen Obama (and countless others) at the Bilderberg meetings.

      No attribution.

      4. Outlaw lobbyists. The last time I checked, our elected officials are to represent the people of America, not institutions, organizations or their own special interests

      The supremes have ruled on this. If a corporation is a “legal” person, then under the constitution they have a right to petition their Reps. Also there is the First Amendment.
      The question does remain as, to how to get the money out of electing our public officials and keepin ’em honest.
      ==
      Wonder what Ceaser had to say about it.

  • Donalds

    I do..Get rid of the fraud ….Obama

  • I’m a Linda too

    Don’t you think this is an effort to Nationalize Banks? Like what Paulson/Geithner tried to do in Sept. Like when they were pushing B of A to take on the debts of Merryll Lynch, and then they change the rules after the fact? If they talk Chase to take on more debt and Chase doesn’t know the extent of their toxic purchase and it too has the strings attached???????

    • shadow

      Of course it is. They want to change their stock in the banks to common stock so they will have control. They won’t let the banks repay the tarp funds so they maintain control. They forced banks to take the tarp money even though they didn’t want it. It’s all about control. This is their plan. Next will be health care where they tell us what kind of treatments we can have.

  • Citizen70

    I’d like to make a modest proposal to all like-minded citizens who are sick of seeing their hard-earned money being wasted by our government officials. Whenever we say “government” in the context of spending, let’s replace it with the term “government taxes, debt and newly printed money”. I know it’s a mouthful; if anyone has a more succint description, let’s hear it!

  • Tom Cat “wodie j” Jefferson Esq

    Well isn’t that convenient-they’ll be allowed to repay only if it benefits national interest-by whose standards??

    Bank of America should fall flat on their ass. They were giving credit cards to illegal aliens and doing all kinds of other shady crap.

    Perhaps this scenario will wake corporations up that they can’t pass out these insane bonuses and exec pay with no accountability! I am all for capitalism and people who work hard being paid accordingly. But they just jumped off a cliff w this. It’s their own fault and we’re paying for it.