If anything underlined the need for a credible revamp of the flawed TARP and its $US700 billion of bailout money for banks, it was the failure of three more small banks across the country on Friday night.
US Treasury Secretary, Tim Geithner was due to outline the revamped (and renamed) TARP fund in a speech at around 4 am tomorrow our time. It can’t come too quickly.
But announcement of the banking bailout package has been postponed a day to allow tonight’s Senate vote on the overall stimulus package to happen without any distraction.
The US Treasury revealed the day’s delay early Monday morning, Australian time.
US bank shares jumped Friday in anticipating of the speech, but then Friday news dribbled out of three closures: two in California and one in Georgia which had been seized by regulators earlier in the day, closed and sold off.
The closures took to nine the number of banks shut so far this year, with three coming on each of the last two Fridays. A total of 25 were closed in 2008.
The two Californian banks had more than $1 billion in assets.
The way US stocks finished on Friday, there’s a lot of hope riding on the Obama administration’s bank rescue plan, to be unveiled at noon Washington time today.
As well news that the general stimulus package seems to be poised to make its way through Congress, will also help boost sentiment.
Friday’s 2% rise was despite the terrible news about jobs last month, which showed the biggest one-month job losses in 34 years.
In fact the 3.6 million or so jobs so far lost in the last 12 months is the worst for any 12 month period since the US started compiling unemployment data back in 1939.
But many believe the jobs figures, bad as they, bring the stimulus package closer to being approved and the recovery in the economy closer as well.
A near 12% surge in bank shares on Friday led Wall Street higher as investors believed that the new bank plan will shore up bank balance sheets and encourage lending
Bank of America jumped 27%, after hitting a 20 year low on Thursday. It said it wouldn’t need more government capital. Citigroup and JPMorgan Chase added at nearly 11%.
That was the most positive day’s trading so far this year among financials and bank stocks.
Just what will be in the package isn’t clear, despite lots of leaks.
Economists say it will likely take more than the $US350 billion remaining under the Troubled Asset Relief Program to fund the next round of federal programs.
One report on Reuters said that US insurance companies that applied for capital injections from the government’s bailout fund could get approval as soon as later today.
About a dozen insurers have applied for capital injections, but it is unclear which companies will get approval.
All reports suggested the Obama plan would be an overhaul of the whole Bush program."
A number of options have been under discussion including a government-funded ‘bad bank’ that would remove so-called toxic assets from bank balance sheets as well as a taxpayer-funded insurance plan to cover losses on troubled bank investments.
The bad bank might not happen, say other reports, with the approach similar to that in the UK – based on asset guarantees. (There are reports the UK approach could total close to $A1 trillion in dud securities).
Either approach though would see hundreds of billions of new dollars committed to the schemes, at a time when many in the US wonder if protecting a bunch of banks is worth it, especially with publicity about huge bonuses, pay and other rorts.
But they should remember the terrible damage the collapse of Lehman Brothers has already done to the US and global economy.
A major part of the plan would be a major expansion of a lending facility begun in November by the US Fed.
The program, which was initially financed by $US200 billion in Fed money and $US20 billion in seed capital from the $700 billion bailout fund, lent money to investors to buy securities backed by student, auto and credit card loans, as well as loans guaranteed by the Small Business Administration.
Obama administration officials have reportedly said they have rejected nationalizing institutions by taking large ownership stakes.
They also will not immediately seek additional money from Congress beyond the $US350 billion left in the TARP fund.
The banking plan will reportedly involve a close review of financial institutions, possibly including a so-called stress test to measure whether they have enough resources to weather a continued economic decline.
It will also enable the government, when it provides a new round of investment, to convert the warrants for preferred stock it has already received from many institutions into common stock.
The move, which essentially would swap debt for equity, would help relieve the balance sheets of those institutions, although it would also hurt other existing shareholders by diluting their common stock.
Much of the detail won’t come in tonight’s speech: only the outline. One element that will get considerable play is spending over $US50 billion helping homeowners facing foreclosure.
Another idea gaining some publicity would involve the US government putting up the finance for private-sector purchases of troubled assets.
Private investors could commit funds of their own then borrow from the Fed or other government bodies to increase their buying power.
It could get new capital into the markets, and help establish market prices for securities that have traded only infrequently and at deeply distressed prices in recent months.
That might help the question of how willing the banks will be to sell to
