Good news! It's bailouts all around!
Banks will start undergoing new stress tests this week, but the "too big to fail" institutions need no longer fear the test results as the Treasury and Federal Reserve Board came out with a pre-emptive guarantee Monday to prop them up.
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A joint statement from Treasury, the Federal Deposit Insurance
Corp., the Office of the Comptroller of the Currency, the Office
of Thrift Supervision and the Federal Reserve released Monday
said:
we reiterate our determination to preserve the viability of
systemically important financial institutions so that they are able to
meet their commitments. ... Should [the stress test] assessment indicate
that an additional capital buffer is warranted, institutions will have
an opportunity to turn first to private sources of capital. Otherwise,
the temporary capital buffer will be made available from the
government.
The "temporary" buffer will come in the form of convertible preferred
shares and are intended to act as a "cushion against larger than
expected future losses, should they occur due to a more severe economic
environment." The government's preferred shares from prior TARP
investments will also be eligible to be exchanged for the mandatory,
convertible preferred shares.
The statement also danced around the hot-button topic of
nationalization, saying that "the strong presumption of the Capital
Assistance Program is that banks should remain in private hands."
The market has crushed shares of Citigroup Inc. (NYSE:C) and Bank of America Corp. (NYSE:BAC) over
the past week on fears that their situations were becoming so untenable
that the government would need to take them over.
The statement may be a precursor to another
capital injection
into Citigroup from the federal government. The bank is
reportedly trying to restore confidence in its viability and head off a
potential nationalization by getting the government to give it more
money, but not take a controlling stake. -
George White
See statement
See Dealscape post on Citigroup plan
