Stocks Lower After $250 Billion Bank Investment Plan
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After opening strongly, stocks have been trading on both sides of break-even today following the details of the U.S. government's bank investment plan. U.S. Treasury announced it will directly invest in various banks and financial institutions in an effort to bolster the struggling banking system and stimulate lending. Under the program, Treasury will purchase up to $250 billion of senior preferred shares.
At 3:20PM ET, the Dow was down 153, the Nadaq was down 69, and the S&P 500 was down 15.
Initially, the U.S. government will buy preferred equity stakes in nine leading banking institutions. Citigroup (NYSE: C), JP Morgan (NYSE: JPM), Bank of America (NYSE: BAC)/Merrill Lynch (NYSE: MER) and Wells Fargo (NYSE: WFC) are expected to get $25 billion each; Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) are expected to get $10 billion each; Bank of New York Mellon (NYSE: BK) will get $3 billion; and State Street (NYSE: STT) will get $2 billion.
The funds the Treasury will use for the capital injections will come from the $700 billion Troubled Assets Relief Program already approved by Congress. The focus of the original U.S. plan was to buy the troubled assets of the banks, but the speed of the deterioration in the credit markets and a capital injection plan already put in action in the U.K. has placed the U.S. focus on this more immediate solution.
The Treasury said the minimum subscription amount available to a participating institution is 1 percent of risk-weighted assets. The maximum subscription amount is the lesser of $25 billion or 3 percent of risk-weighted assets. The senior preferred shares will qualify as Tier 1 capital and will rank senior to common stock and pari passu, which is at an equal level in the capital structure, with existing preferred shares, other than preferred shares which by their terms rank junior to any other existing preferred shares. The senior preferred shares will pay a cumulative dividend rate of 5 percent per annum for the first five years and will reset to a rate of 9 percent per annum after year five. The senior preferred shares will be non-voting, other than class voting rights on matters that could adversely affect the shares. The senior preferred shares will be callable at par after three years. Prior to the end of three years, the senior preferred may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock. Treasury may also transfer the senior preferred shares to a third party at any time. In conjunction with the purchase of senior preferred shares, Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15 percent of the senior preferred investment. The exercise price on the warrants will be the market price of the participating institution's common stock at the time of issuance, calculated on a 20-trading day trailing average.
The financial institution that choose to participate must must meet certain standards, including: (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.
In addition to the capital injections, the FDIC was granted the power to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts.
Also, the Federal Reserve announced further details of its Commercial Paper Funding Facility (CPFF). Beginning October 27, the CPFF will fund purchases of commercial paper of 3 month maturity from high-quality issuers.
At 3:20PM ET, the Dow was down 153, the Nadaq was down 69, and the S&P 500 was down 15.
Initially, the U.S. government will buy preferred equity stakes in nine leading banking institutions. Citigroup (NYSE: C), JP Morgan (NYSE: JPM), Bank of America (NYSE: BAC)/Merrill Lynch (NYSE: MER) and Wells Fargo (NYSE: WFC) are expected to get $25 billion each; Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) are expected to get $10 billion each; Bank of New York Mellon (NYSE: BK) will get $3 billion; and State Street (NYSE: STT) will get $2 billion.
The funds the Treasury will use for the capital injections will come from the $700 billion Troubled Assets Relief Program already approved by Congress. The focus of the original U.S. plan was to buy the troubled assets of the banks, but the speed of the deterioration in the credit markets and a capital injection plan already put in action in the U.K. has placed the U.S. focus on this more immediate solution.
The Treasury said the minimum subscription amount available to a participating institution is 1 percent of risk-weighted assets. The maximum subscription amount is the lesser of $25 billion or 3 percent of risk-weighted assets. The senior preferred shares will qualify as Tier 1 capital and will rank senior to common stock and pari passu, which is at an equal level in the capital structure, with existing preferred shares, other than preferred shares which by their terms rank junior to any other existing preferred shares. The senior preferred shares will pay a cumulative dividend rate of 5 percent per annum for the first five years and will reset to a rate of 9 percent per annum after year five. The senior preferred shares will be non-voting, other than class voting rights on matters that could adversely affect the shares. The senior preferred shares will be callable at par after three years. Prior to the end of three years, the senior preferred may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock. Treasury may also transfer the senior preferred shares to a third party at any time. In conjunction with the purchase of senior preferred shares, Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15 percent of the senior preferred investment. The exercise price on the warrants will be the market price of the participating institution's common stock at the time of issuance, calculated on a 20-trading day trailing average.
The financial institution that choose to participate must must meet certain standards, including: (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.
In addition to the capital injections, the FDIC was granted the power to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts.
Also, the Federal Reserve announced further details of its Commercial Paper Funding Facility (CPFF). Beginning October 27, the CPFF will fund purchases of commercial paper of 3 month maturity from high-quality issuers.
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