Feds say they will prop up all the big banks

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.

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