BW Communities

The Drama Unfolds

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[All Eyes On Him: US Treasury Secretary Henry Paulson (AP) The $700-billion bailout assembled by the US government to assist troubled banks is being spent as quickly as Treasury Secretary Henry Paulson promised. It is also being spent as arbitrarily as many in the US Congress feared. So far, nine national banks have been allocated $125 billion under the Treasury Department’s capital injection programme (see ‘The Money Trail’), which has been partly intended to help larger banks buy smaller sick ones. Now the programme is being extended to regional banks with PNC Financial Services getting $7.7 billion in support, part of which helped it buy National City, an ailing small bank. The criticism that bailout banks will ultimately benefit from this at the taxpayers’ expense is also rising. The banks being bailed out are giving the US government warrants worth just 15 per cent of the money they receive. The strike price of the warrants is based on banks’ stock prices at the time of issuance. Some banks are even using bailout money to fund their lobbying efforts. The only concession bailed out banks are making is to limit executives’ pay and severance packages. Source: US Treasury Department One particular bank has been denied assistance, according to Washington rumours. It is unclear as to why. Paulson, who has assumed significant powers under the bailout plan, has said little about the basis on which the Treasury Department will disperse its bailout bucks. All Treasury officials have publicly said is that they will aid only ‘healthy’ institutions. For example, Paulson has said the reason the Treasury did not aid Lehman Brothers and allowed it to fail — an act many say fuelled the current market mayhem — was that its CEO Dick Fuld ignored official prodding to sell the bank. Paulson has maintained Lehman had “a huge hole” in its balance sheet and fell into such a bad financial state that the government and/or Federal Reserve couldn’t prop it up. Bear Stearns and AIG, on the other hand, Paulson has said, could be saved as they had worthy collateral. But media reports say Lehman was never reproached by the government nor was it ever asked to look for a white knight. It is expected that the Secretary will soon hand out another tranche of money to more regional banks. There are also reports that the Treasury will begin to extend the capital injection programme to take equity stakes in troubled insurance companies. With so much cash at stake, the question of how the Treasury is doing its due diligence is being raised by angry Congressmen, many of whom voted against the bailout in the first place. To them the situation looks a bit like the one described in the musical Evita: When the money keeps rolling in you don’t keep books. You can tell you’ve done well with the happy, grateful looks. But there may be no other choice. Credit rating agencies such as Moody’s and Standard & Poor have been widely discredited because they had given enthusiastic thumbs up signals to subprime securities. In these times of crisis, it is hard for investors to trust anyone, even the Treasury. bweditor(at)abp(dot)in (Businessworld Issue 04-10 Nov 2008)