Big Banks Get $125* Billion Cash Going Away Gift From Paulson and the Bush Administration

Please sit down before you read this. If you have high blood pressure or heart trouble don't even try to read this, find a decent sports page instead, this is not for you.

Approximately half of the first $250 billion tranche of money approved by Congress for the mortgage crisis will end up in the hands of the "healthy" big banks.

"For the good of the American financial system," Treasury Secretary Paulson has told the big banks they must take his $125 billion (Give or take a billion or two) handout, reports NYT.

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch. So much for bailing out the mortgage market.


Here's the kicker: The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings. In other words, all current shareholders are protected, unlike Lehman, Bear Stearns, Fannie Mae and Freddie Mac shareholders.

No matter how they frame this,the truth is this is a roughly $125 Billion going away gift from the Bush Administration to Wall Streets elite.

UPDATE: The exact terms of the funding have been released by Treasury. For the first five years, the dividend on the preferred stock will be only 5%, not 10%. The full terms on the funding can be found here.

*Note I initially put the headline handout number, and number in the story, at $135 billion. The handout number is a bit unclear, so to be conservative I have lowered the total handout estimate to $125 billion

They Are Getting Ready To Divvy Up The Lucre: US Summons Only Super Elite Bankers To A Meeting

The Bush administration summoned executives from leading banks to a meeting in Washington Monday afternoon to work out details of the $700 billion plan.

And, as they say in Chicago, "If you are not at the table, you are on the menu."

For the record those expected at the table are:

Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, JPMorgan Chase & Co. CEO Jamie Dimon, and Bank of America Corp. CEO Kenneth Lewis were all asked to attend. There was some speculation that Paulson might have expanded the invitation to at least three other CEOs from various regional banks, people said.

The FDIC directly examines and supervises about 5,250 banks and savings banks, and Paulosn invites at most 8 bankers to discuss how to divvy up $700 billion?

"It was expected that whatever comes out of the meeting will be used to put the finishing touches on the plan," AP reported its sources as saying.

The Morning Ahead

The factors to monitor in the morning are near overwhelming.

To start, we have an FOMC meeting. Will the Fed cut rates?

Henry Paulson is scheduled to testify before Congress in the morning, and later in the day he is scheduled to give a speech at the Brookings Institute about the economy and housing. He is likely to be very cautious at both venues about what he says. Will he by accident trigger more downside action?

Lehman has filed for Chapter 11 and other banks have continued to trade with it. Yet, despite being in Chapter 11, and presumably under court supervision, Lehman continues to push for a shotgun sale of its money management firm, among other assets. How will this activity sit with the bankruptcy judge and other bankers?

The Merrill Lynch acquisition by Bank of America looks shaky. Will the deal still be alive by the end of the day? How tight of an acquisition contract was John Thain able to draw up in such an intense, short term period?

What news will develop from the AIG situation?

How will the markets react to the downgrade of WaMu?

Will the panic in the investment bank arena spread to the two remaining major independent players, Morgan Stanley and, the very well connected, Goldman Sachs? 

How bad will things get overnight in overseas trading?

Have a good nights sleep.

-Robert Wenzel

What Takeover?

Has Bank of America Chairman Ken Lewis come to his senses? Has the ether Merrill Chairman John Thain slipped Lewis during his sales pitch to get Lewis to buy Merrill, at a premium to the market price in the middle of a crisis, worn off?

Somebody thinks so.

Merrill Lynch shares closed today at $17.06, up all of one cent since Bank of America agreed to buy the company for stock at $29.

BTW: It's clear B of A shareholders think Lewis has lost his mind. B of A closed down 21.31% to $26.55, a drop of $7.19 on the day.

-Robert Wenzel

Merrill/Bank of America Will Fire 20,000 plus

On its conference call this morning, Bank Of America/Merrill Lynch said that as part of their merger they will be able to save $7 billion annually.

Henry Blodgett calculates this to mean 20,000 will be fired.

His assumptions:

$5 billion of the $7 billion is compensation costs (the rest is real estate) at
$250,000 average compensation per employee.

The sound you hear is falling Manhattan real estate prices.

-Robert Wenzel

Ten Banks Commit to $70 Billion Borrowing Facility

Ten of the world's biggest banks on Sunday committed to establish a $70 billion borrowing facility to bolster worldwide liquidity.

Each bank has committed to fund $7 billion for the collateralized facility, and any one of the 10 banks would be permitted to borrow up to one-third of the total facility, the banks said in a joint statement. The financing may grow "as other banks are permitted to join," they said.

The 10 banks are Bank of America Corp, Barclays Plc, Citigroup Inc, Credit Suisse Group, Deutsche Bank AG, Goldman Sachs Group Inc, JPMorgan Chase & Co , Merrill Lynch & Co , Morgan Stanley and UBS AG.

Note: Interesting that Merrill is on the list, since they were just bought/bailed out by B of A.

-Robert Wenzel

B of A Takeover of Merrill A Done Deal (Almost)

In a rushed bid to ride out the storm sweeping American finance, 94-year-old Merrill Lynch & Co. agreed late Sunday to sell itself to Bank of America Corp. for roughly $44 billion, WSJ is reporting.

However, WSJ added this caveat:

As of Sunday evening, a deal had not yet been signed, said people briefed on the discussions. And other last-second bidders could emerge from the woodwork. Yet with news of the Bank of America talks breaking Sunday, it became all the more difficult for Merrill and Mr. Thain to rebuff a deal. Should the talks collapse, most on the Street were expecting Merrill's shares to fall even further amid widespread worries about independent broker-dealers.

WSJ then quotes analyst Nancy Bush at NAB Research LLC in Annandale, N.J:

"Why would Bank of America do this?" said analyst Nancy Bush at NAB Research LLC in Annandale, N.J. "Ken Lewis always likes to buy the biggest thing he can. So why not this? You are master of the universe, basically."...

"I think John Thain at Merrill is the ultimate realist," Ms. Bush said, the analyst, who expected federal regulators to bless the deal by relaxing deposit limits for bank-holding companies. "He knows if Lehman goes under he is not far behind. He wants to cut the best deal he can."

I have to agree completely with the Bush take on the situation. Do note,closely, though, this part of the report: "Ms. Bush said, the analyst, who expected federal regulators to bless the deal by relaxing deposit limits for bank-holding companies..." Not only has this crisis proven beneficial to B of A by the fact it gets to by Mother Merrill at a crisis discount price, but, without the crisis, this deal couldn't even have been done because of federal regulations that set deposit limits for bank holding companies. These crises always create opportunities for the real operators. B of A is obviously among them.

-Robert Wenzel

Has Mother Merrill Found A Daddy?

Bank of America and Merrill Lynch & Co. Inc. are in merger discussions, according to WSJ.

The talks come amid a Wall Street scramble to sort out a potential liquidation of Lehman Brothers. Much remains uncertain and conditions were fluid.

UPDATE: NYT reports, Bank of America is in advanced talks to buy Merrill Lynch for
$25 to $30 a share, people briefed on the negotiations said on Sunday. It would be an all stock deal.

A deal could be announced as soon as tonight. Merrill shares closed at $17.05 on Friday.

-EPJ Newsdesk

Still No Resolution On Lehman

As of 11:31 PM ET Saturday evening, WSJ is reporting that no resolution has been reached in the Lehman crisis. The problem appears to be in understanding just what risks exist in Lehman and, thus, why any institution would step up to the plate, not knowing the downside.

There are buyers for the 'good' assets of Lehman, but no takers for the 'bad', i.e. unknown risk, assets. With the clock ticking to Asian markets opening Sunday evening, Paulson and Bernanke may be forced to step in.

Possible scenarios:

A complete "orderly" liquidation of Lehman.

OR

Good assets are bought by a bank, possibly Bank of America. Bad Assets are put in a newly formed corporation, owned by several banks, where the new corporation issues new debt to finance the deal that the Fed will immediately accept at the discount window. Lehman common shareholders are wiped out. Lehman debt holders are forced to take a haircut.

Merrill Lynch Chairman and CEO John Thain leaving the meeting at the New York Federal Reserve.

-Robert Wenzel

Heavy Bank Refinancng Will Keep Pressure On Rates

According to Dealogic, borrowing needs for the top 10 banks from maturing bonds total $27bn in August, $52bn in September, $23bn in October, $20bn in November and $86bn in December. Raising these funds by simply getting investors to rollover maturing money into new debt instruments will be much more difficult given the nervousness by investors over bank liquidity issues. As a result, borrowing costs will be very high.

Last week, financial groups including Citigroup, JPMorgan Chase and American International Group borrowed almost $20bn in new long-term debt, paying some of the highest interest rates ever in order to lock in funding.

Citigroup has more than $5bn of maturing bonds in August, but this climbs to $12.8bn in December. Bank of America, with $7bn maturing in August, also faces higher refunding needs in December, with $9bn of maturing bonds.

Mohamed El-Erian, co-chief executive of Pimco, the asset management group, told FT “If banks keep borrowing at these levels, you will get a repricing of credit for the whole economy.”

Bank of America Receives Subpoenas Relating To Its Sale of Auction-Rate Securities

Bank of America Corp. reported today that it has received subpoenas and requests for information from various state and federal regulators regarding its sale of auction-rate securities.

Auction-rate securities are bonds whose interest rates were set at periodic auctions, on the basis of bids submitted. The market collapsed for them in February after big banks stopped bidding for them.

Earlier today, Citigroup said it reached a settlement with the New York Attorney General and regulators on $19.5 billion in auction-rate securities and pay $100 million in fines.

The entire market in auction-rate securities is believed to be in excess of $200 billion.

Top Analyst Expects Final Drop In Housing Prices To Be Over 33%

Oppenheimer & Co.'s Meredith Whitney, the analyst who, very early in the game, correctly predicted Citigroup would reduce its dividend, even when Citigroup denied that it would, said in an interview on Bloomberg Television with Carol Massar, that the housing decline will continue and that it won't be over until house prices drop more than 33% from thier peak levels.

Whitney has also downgraded Wachovia Corp and said the earnings outlook for Wachovia. has ``dramatically diminished''. She also said that she remains negative on Citigroup, Wells Fargo and Bank of America. She said she is particularly concerned about Wells Fargo since it even fails to disclose the data that would make it possible to understand its true financial position.

Whitney said that Wachovia appears to be trying to shrink its balance sheet and that "historically, financials have not shrunk well.'' She said Wachovia last week released charge-off figures that didn't correspond with portfolio values, meaning the bank might be shrinking its balance sheet. ``Your revenues go down dramatically. Effectively, you'd be eroding capital,'' said Whitney.

Bank Of America Basically Wrote the Bank Mortgage Bailout Bill

In posts below we detailed the curious meetings between the Federal Reserve and private equity funds such as Carlyle Group, on the attempts to change banking regulations to make it easier for private equity funds to buy large chunks of banks. We wrote:

While we have no problem with free markets being allowed to operate, as we asked in our earlier post, what's all this "dialogue" between the Fed and Carlyle Group and other private equity funds about?... There's a few lessons to be learned here about how the power elite operate. First, they always take advantage of crisis to make a grab...[And]They always make things complicated.

Always be suspicious of "dialogue" between a regulator and the regulated. It usually ends up being a plot by the regulated to carve out some benefit.

Indeed, the mortgage crisis is turning into a feast for the well connected power elite to take advantage of the crisis atmosphere and use it for their own benefit. Not only is private equity attempting to grab the banks, but the elite banks are writing the mortgage bailout bill to their benefit. Where's my proof. Here's my proof. My comments on private equity attempting to grab banks is here, here and here. As for the power elite banks, consider:

It appears that Bank of America essentially wrote the bailout section of the Dodd-Shelby mortgage bailout bill. National Review Online obtained a copy of an internal Bank of America's 64 page “discussion document” on the Dodd-Shelby bill.

Stephen Spruiell at NRO writes:

Almost all of BofA’s preferences are mirrored in the Dodd-Shelby legislation. The BofA document even offers PR tips, such as “We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market.”... the similarities between BofA’s ideal bill and the bill before the Senate are obvious even to the layperson — read the document, then read David C. John’s analysis of the bailout and see for yourself.

The bill itself, as would be expected, is totally to the benefit of the likes of Bank of America and Countrywide. (Bank of America agreed in January to buy Countrywide.) MrMortgage writes:

This $300 billion Dodd-Shelby bailout is an absolute crime. It bails out the banks by limiting their loss to 10%; a joke since many of the problem areas like CA are down as much as 30% already on the median in the past 12-months and the rate of acceleration of the price declines are picking up steam. The subprime crisis is nearly over and now Prime, Alt-A, Pay Option ARMs and Home Equity Lines/Loans are failing. If they get this $300 billion passed, another $1 trillion+ will have to come on its heels for all of the other bailouts.

This needs to be fought and/or vetoed or it’s potentially $300 billion of taxpayer money down the toilet.

Timothy Carney reports:

We call it the 'Bank of America bill on steroids.'" A House staffer told me that, demanding anonymity, but speaking on behalf of aides to GOP members of the House Financial Services Committee.