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Commentary

$250 billion going to U.S. bank capital

From NYT: US Investing $250 billion in banks

Of the $250 billion, which will come from the $700 billion bailout approved by Congress, half is to be injected into nine big banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase, officials said. The other half is to go to smaller banks and thrifts. The investments will be structured so that the government can benefit from a rebound in the banks’ fortunes.

The preferred stock that each bank will have to issue will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years. The government will also receive warrants worth 15 percent of the face value of the preferred stock. For instance, if the government makes a $10 billion investment, then the government will receive $1.5 billion in warrants. If the stock goes up, taxpayers will share the benefits. If the stock goes down, the warrants will be worthless.

So now the government gets a 5% dividend (12.5bn a year) and stock warrants to buy $37.5 bn worth of stock. Nice.

Indian markets didn’t seem to like it too much – but that may be a temporary situation. The markets closed even.

Europe, though is up 5% on average. The Nikkei is up 14% (but yesterday was a holiday there, so it’s catching up) and a lot of other Asian indices are 3% up or more.

(I personally think this is very bullish – there wasn’t too much volume today, and it’s likely that people are just staring in disbelief. But then I’m long, so I may be fooling myself 😉 )