Wednesday, February 11, 2009

TARP II: The Return

Yesterday's announcement of the next round of bailouts didn't please the market. Its interesting to me how these guys say that the first bailout had little transparency and and money is unaccounted for, and yet they offered little detail about this bailout. Its seems like playing politics.

The details I did read were eye-opening to me. With massive dollar figures thrown around on a daily basis, we all get a little numb to them after awhile. What's $100 billion here or there? But reading some of the language made me realize how crazy this is.

I'll paraphrase here, but these are the basics. First there is a requirement of all financial institutions with $100 billion in assets to undergo a "stress test", whether they are in sound condition or not.

Then, banks receiving aid are subject to three provisions:

1) Restricted from paying quarterly dividends in excess of $0.01 until the government funds are repaid. There goes the last reason for investors to buy the common stock.

2) They can't repurchase their own shares. Not likely anyway. They're more likely to issue more of their own shares, but banks in decent shape could technically purchase shares at depressed rates to, get this, ENHANCE, shareholder value.

3) No acquisitions. To me, this is interfering in the market process, but it would be opening a can of worms anyway. Would the government have to sign off on the deal first?

Not surprisingly, the market didn't want anything to do with it. The market doesn't like change and uncertainty, and this plan promises plenty of both.

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