Stress Tests Results In And Taxpayers Are Staying On The Hook
Stress Tests Results In And Taxpayers Are Staying On The Hook
Today, the government released the results of the stress tests performed on the nation’s 19 largest banks. Thanks to a series of leaks, we already knew that the not-very-stressful tests resulted in large-but-not-catastrophic capital holes for the banks to fill. Bank of America leads the pack — needing to raise $34 billion — but most banks need to raise far less, if any.
However, one interesting aspect of the announcement is how the government plans to help the banks raise the capital that they need. While the banks will presumably do their best to go out and raise capital from private investors, if they can’t, they will have the option of converting the shares that the government bought with the initial round of TARP into a new financial instrument:
This new instrument, called a “mandatory convertible preferred” share, gives banks the ability to create common equity as needed. The preferred shares convert to common shares when a bank or its regulator decides they should.
This means that the banks can convert government debt into equity if they hit a rough patch and the need arises. But as Robert Reich pointed out, “by this sleight-of-hand, the public takes on more risk,” moving from a preferred creditor to a common shareholder.
But more importantly, this whole song-and-dance means that the banks are still operating with a government guarantee, but without government control. They can go out and try to raise money, and investors know that the government is going to cover them if things go badly. The plan assures that the banks will remain alive, no matter how troubled, because Treasury will always swoop in to save the day. As James Kwak and Simon Johnson put it:
In the end, when a financial system is dominated by banks that are too big to fail – and they do fail – the only options are an FDIC-style takeover or the kind of public-private co-dependency that we see today. As far as the current crisis is concerned, the die is cast and the big banks won.
4 Responses to “Stress Tests Results In And Taxpayers Are Staying On The Hook”
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Geithner mentioned other backstops for banks raising private capital. On Charlie Rose Tim referenced the FDIC and the Fed, but wouldn’t give specifics on bankstops:
http://peureport.blogspot.com/2009/05/three-years-to-regulatory-reform.html
May 7th, 2009 at 6:38 pmraivo pommer-www.google.ee
raimo1@hot.ee
ROOSEVELT TRICK
Zehn der 19 größten US-Institute benötigen insgesamt 75 Milliarden Dollar – das ist weniger als erwartet und zeigt zugleich, dass bereits neues Vertrauen geschaffen wurde. Doch bedeutet das Ergebnis des von US-Präsident Obama verordneten Stresstests schon die Wende in der Finanzkrise?
Präsident Franklin D. Roosevelt beendete im März 1933 die größte Bankenkrise der Geschichte mit einem Trick. Er verkündete “Bankferien”: Alle Kreditinstitute wurden für vier Tage geschlossen; danach durften die meisten von ihnen wieder öffnen, aber erst, nachdem Experten der Regierung die Bücher geprüft und die jeweilige Bank für überlebensfähig erklärt hatten.
Es war der Wendepunkt der Weltwirtschaftskrise in Amerika: Dank des staatlichen Gütesiegels konnte der Finanzsektor wieder Vertrauen gewinnen, das Kreditgeschäft begann sich zu normalisieren. Was für Roosevelt die Bankferien waren, das ist für Barack Obama der Stresstest. Zweieinhalb Monate lang hatten Experten des Finanzministeriums und der Notenbank Federal Reserve die Bücher der 19 größten Banken der Vereinigten Staaten geprüft.
Jetzt liegen die Ergebnisse vor. Die Regierung ordnet zwar nicht an, welches Institut bestehen bleibt und welches nicht, aber sie scheidet auf andere Weise die Starken von den Schwachen: Sie bestimmt, welche Bank wie viel Kapital braucht, um die Krise durchzustehen.
May 8th, 2009 at 6:32 amCommon stockholders elect board members. Anyone with over 50% of voting rights, effectively controls the board, and thus management.
This post is incorrect in terms of “government control.”
May 8th, 2009 at 2:02 pmStateofthedivision:
You’re right that common stockholders elect board members and thus effectively control management. But what the Geithner plan does is keep the government’s stake as preferred until the banks/regulators decide a conversion to common needs to happen.
Thus, the banks can raise capital — and investors will put their money forward — because they know that Treasury has them covered. IF the banks were to convert, then yes, the government would have voting rights. But RIGHT NOW, Treasury is guaranteeing that the banks are covered, while not exercising any control, which is what the post says.
May 8th, 2009 at 3:09 pm