Here we are, more than one year into the credit crisis, and long after the collapse of Bear Stearns, and a month after Lehman Brothers, AIG, WAMU, Fannie/Freddie, Wachovia, etc. and we are getting a capital injection into the key banks.

As we noted yesterday, Paulson (and to a lesser degree, Bernanke) were way behind the curve in recognizing the Housing, Economy and Credit issues.

Although Paulson was against the capital injection, the Fed chair was not. the As Krugman noted yesterday, "this was also the solution privately favored by Ben Bernanke."


Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben S. Bernanke and FDIC Chairman Sheila Bair are scheduled for a press conference at 8:30 am . . .


graphic courtesy of NYT




Joint statement by Federal Reserve, U.S. Department of the Treasury, and Federal Deposit Insurance Corporation (FDIC)

President’s Working Group Market Stability Initiative Announcement

Treasury Said to Invest $125 Billion in U.S. Banks 
Robert Schmidt and Peter Cook
Bloomberg, Oct. 14 2008

U.S. Investing $250 Billion in Banks
NYT,  October 13, 2008   

Gordon Does Good
NYT, October 12, 2008

Bank Bailouts to Make Recession `More Manageable,’ Volcker Says
Chen Shiyin
Bloomberg, Oct. 14 2008

U.S. to Buy Stakes in Nation’s Largest Banks   
WSJ, OCTOBER 14, 2008

Intervention Is Bold, but Has a Basis in History 
NYT,October 13, 2008

Category: Bailouts, Credit, Federal Reserve, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

58 Responses to “Long Overdue Capital Injection”

  1. John Borchers says:

    They had to leave some go under Barry.

    With LEH taking $880B in debt down the tubes with it the financial crisis got that much more manageable with future injections.

    If they would have invested sooner they would have needed 3-4 times as much money.

  2. jtk says:

    i believe you forgot to include WFC.

  3. Tom E. says:

    Banks that are bailed out should be banned from political lobbying until they pay the money back. Just like with Freddie and Fannie.

    Otherwise they will lobby to sweeten the terms in the future.

  4. harold hecuba says:

    from what i understand the preferred shares are not dilutive to current shareholders. this is preposterous. i’m all for capital injections but this is simply a transfer of wealth. how long does the taxpayer have to bend over and realize he is being taken. i sense a revolution in the making. time to hoard ag products

  5. Aurora Borealis says:

    Here we have J.P.Morgan topping the list…

  6. GreggT says:

    Charles Morris has a new piece that suggests “we may have reached the point where the cure is scarier than the disease.”

    “Amid the clamor over the crisis on Wall Street, the U.S. Treasury’s $700 billion Troubled Asset Rescue Program, or “TARP,” bill and the evolving collapse of the global banking system, little attention has been paid to the extraordinary credit extensions at the Federal Reserve. But these are now without parallel in Fed history, including during the Great Depression.”

    Looks to me like more (as Red Green would recommend) “living in denial”.

  7. Philippe says:

    One cannot refrain from thinking that everything surrounding the financials demises is nausea , the pyromania men and their boards are still in place, the capital injection is blind folded (level 2/3 of many banks are dwarfing their nominal capital injection)
    There is an explicit acknowledgement from all parties involved that no responsibility is to be questioned and no real remedy but expedients are available.
    My best advise fix it and fix it well as it will come back very soon haunting the economies

  8. steve says:


    Excellent web site. Told my son about it and he enjoys it too. Unfortunately I missed the explosion up yesterday. And since I work for the government, we are only able to get back in today at the end of today’s prices. So by then I will have missed out on two up days. My question is do you think the profit takers will take it back down on Wed? I seem to be a great market timer but always in the opposite direction. Thanks.

  9. chad says:

    How many “injections” has Citi had now? Oh, this is money that hasn’t been circulated yet, so its better. Now I get it.

  10. Tigger says:

    >>>>i sense a revolution in the making.

    Thank God for the “Patriot” Act so the govt can protect itself from “we the people”.

  11. cloudy says:

    I find it so ironic –maybe hypocritical–that so many how have lambasted Greenspan and his inflation of the markets by lowering rates, are now celebrating that this Fed and and Treasury are moving heaven and earth to support the markets. Yes, you can say this is different, but that’s what Greenspan said at the time.

    Friday during the last manic hour, they had some futures floor trader on CNBC or Bloom on camera saying Goldman was coming in with waves and waves of buying.
    Talk about Front-Running. Is the SEC going to investigate this? I think not.

    I am in cash. market is just too artificial for me and I’m wondering if it is just time to walk away.

  12. standup says:

    Recapitalizing the Banks is Simple
    We just have to be honest about it. It doesn’t really take the governments buy-ins to solve the bank equity problem. Oh-unless your foremost concern is to protect the current shareholders (the largest being the same guys/gals that are maybe causing systemic collapse.)
    There are huge amounts of cash waiting on the sidelines of the market to invest, ready and eager, and all willing to pour money into the banks–given the same deals as Buffet and Mitsubishi. Heck, even I would buy bank stock if I could get preferred at 10% (with the long bond at 4.15%), with warrants to buy shares in the future at a historically low price (a free long-dated option)! And as a preferred shareholder, would I get the right to vote my shares to install better management, oversight and risk controls to help stabilize and reform the system? There’s a bonus!
    Let’s get this straight. People would line up around the block to buy bank stocks under these terms and the banks would be recapitalized by the willing and able, (you know, the people who actually save and invest for the longer term. We are out there.) But the bankers won’t sell enough shares at these terms to save the banking system. Why? Because they would be diluted. So instead they let their companies go up in flames and the paymasters at the US Government come in and give them fresh equity out of my pocket, but makes sure that the share values of the guys that caused this , and got rich off it, remain strong and undiluted. This is robbery on the grandest scale of all times.

  13. km4 says:

    Socialism is indeed alive and well in America but this is socialism for the rich, the well connected and Wall Street.

    The bad news is the American middle class are still on the hook for trillions and standard of living for most is likely to go down.

  14. lalaland says:

    I think Paulson thought the republicans would never go for partial nationalization, even if it was the smarter thing to do, so he presented a horrible plan that congress could rework to it’s liking, all the while keeping the backdoor open for the idea Bernanke favored… but maybe i’m not cynical enough!

  15. tss says:

    This is great!

    I am really excited about this. You see, I thought we would all be standing in food lines within the next year. Instead, we will need wheelbarrows of cash to buy a loaf of bread in about 5 years from now! Woo-Hoo, but hey the mkt is up 2 days in a row, so it doesn’t matter that my kids future is bleak and that my Tax bills are going to smother me!!

    Right on.

  16. John Borchers says:

    So many negative posts here after a 10% up day. That means many still have not covered and we get bond inflow today.

  17. RK says:

    It looks like common and preferred dividends are suspended on
    those banks “volunteering” to take the capital injections, according to Steve Liesman”s cursory reading of the bill. Any clarification? Anywhere we can see the full text?

  18. dead hobo says:

    I’m going to sit this one out, until further notice. The moves that support the financial centers are a necessary condition, but not a sufficient one to send the markets back up for a long term run. There are two offsets that give me pause.

    News Item: Pepsi to lay off several thousand. Credit probably had little do to with this. Lack of product demand was a more likely cause. The consumer is 2/3 of the economy, not the financials. If the consumer isn’t buying, profits will decrease and so should stock prices.

    Why might the consumer stop buying? Please note that oil prices are also rising with stock prices. Since oil is now considered an asset class and is not only a consumable any longer, due to clever ways to invest in the commodity and the oceans of money that flow towards it, this is the big unknown.

    If oil resumes it’s fall to the $60 – $80 range then the markets and world economy will reciprocate and shoot towards the stars. I’ll happily help with this. If it soars to $90 and potentially beyond over the next several days then today’s market levels may be only a congestion level and a long term companion. Or maybe they will drop from here. Regardless, the world banks will have only built a bridge to nowhere. That will be a fact and anyone who is thinking buy and hold today without considering the price of oil is just asking for trouble.

    If oil goes back above $100 and remains there, Dow 6000 is a possibility this time next year. High oil prices are killing the world in slow motion. Even oil in the $80 range is troublesome, much like dragging an anchor or a ball and chain throughout the day and at home at night. Fix the oil markets, fix the world. Remember, high oil prices are no longer being offset by rising real estate prices or home refinancing that worked like an ATM.

    Have a great day!

  19. charlie says:

    We seem to be following the same path as Japan. The plan is to make money easily available and all problems are solved. It didn’t work in Japan because they’re savers. The US, on the other hand, loves to spend. I guess we’ll start over and get into an even bigger mess next time.

    I wonder when the Asians and OPEC nations will catch on. If their politicians are anything like ours, they’ll continue to accumulate dollars forever. It will always be easier than the alternative in the short term.

  20. Stuart says:

    participating banks to stop paying dividends????

  21. batmando says:

    Please, someone set me straight if these figures aren’t right, but..
    $250B capital injection into 8 banks with a market value (as of close yesterday) of $490B and we’re not getting at least Buffett-like terms?
    Puh-leez…, excuse me while I bend over to puke, in the course of which exposing my backside to further severe depradation.

  22. randomguy says:

    Movies for Our Time: The New Century Trilogy
    brought to you by Halliburton Adult Entertainment.

    Episode 1-Things To Do In Baghdad For A Dollar
    Episode 2-Nailin’ Palin
    Episode 3-Long Overdue Capital Injection

    (When a headline screams out like this one did, you just gotta’. . .)

  23. rational says:

    The $250B buy is said to be NOT dilutive because these are perpetual preferred shares which are paid a dividend, not a portion of earnings. Aren’t earnings diluted when you take a portion of them to pay dividends to a newly sold preferred stock? Is this claim, that this treasury buy isn’t dilutive, credible?

  24. dblwyo says:

    This stands a good chance of putting the wheels back on the wagon IMHO though we’re still going the face rocky markets. And the real recession is still gathering steam. All that said this might constitute one of the best multi-generational investing opportunities ever.
    But while we’re critisizing the “Establishment” from saving us from our own follies you might want to listen to Krugman’s press conference from yesterday where he’s very balanced. Including this statement that he and nobody else saw this coming in this virulent a form.
    Which is fair enough but both Ben and Hank started anticipating systemic risks and putting the pieces together in the last two years.
    Paul also points out that the real problem was the growth of the shadow banking system and the failure to update and refresh the regulatory regime to meet this evolution. A systemic problem which a) happened on all watches, b) from which we all benefited
    from while the getting was good and c)had no support for fundamental changes that we know acknowledge are required.
    Before we hang all the guilty in the square shouldn’t we first focus on addressing the problems ?

  25. dblwyo says:

    OOPS…here’s the YouTube url to save you the loopup:

  26. Greg0658 says:

    Which banks and financial institutions can borrow from the FED discount window these days? Website please.

    I’m looking for a Chicago region bank that can get those new money rates and offers a credit card for everyday use. I am hoping this bank has “we invest locally rational” as policy.

    Trickle Down has Trickled Out. I gotta take control somehow. Not by gun folks, that ain’t gonna work. The system has bigger guns than I could ever afford, thanks to me.

  27. Stuart says:

    And to pay for all this….. Treasuries are the last remaining bubble to, not just pop, but explode.

    Deutsche Bank said US will need to issue 3.3 TRILLION new bonds in 2009… EDIT: The Budget Deficit…and Macro Policies Going Forward Posted in October 13th, 2008 by admin in Uncategorized Submitted by….
    Let’s assume the Treasury, the Fed and the rest of the community of international financial policymakers are able to stabilize the financial system. What are the fiscal options available, given the borrowing and spending policies of the Bush Administration?

    From Chowdhury and Huie, “Skyrocketing Issuance,”
    US Economics/Strategy Weekly
    (Deutsche Bank, 10 Oct.) (not online):

    Treasury issuance is likely to increase to extraordinary levels over the past year. There are 3 components to the issuance picture. The first is the traditional federal budget, which in fiscal year 2009 is likely to increase substantially from the 2008 deficit of around $440 bn. The second are the various Treasury rescue initiatives that involve buying assets or equities; only the expected net cost will be formally recorded on the budget, but the entire gross spending amount will be added to the issuance requirement. Finally, the Federal Reserve’s liquidity facilities will also add to issuance, as the Fed no longer has capacity to sell or lend the Treasuries in its portfolio; instead, going forward it will rely on the Supplementary Financing Program, where the Treasury issues bills and deposits the proceeds at the Fed, to finance its lending facilities. In total, we expect net issuance to rise to $3.3 tn over the fiscal year.

  28. dead hobo says:

    Rational … not really.

    Basic EPS = (Income less preferred dividends) divided by # of outstanding shares.

    If the preferred shares are convertible into common, they would be dilutive and a fully diluted EPS would accompany the basic EPS figure.

    The real question is: “When will the government be able to sell the new equity at cost or at a profit?” Never (or essentially never) = printing press money and monetizing the required bank capital = “you need cash … here, have some of this … we just printed up a big batch.”

    Aren’t you glad you asked?

  29. Michael M says:

    First of all, watch treasuries. We are now above 4% on the 10 year. Clearly no one cares about that now, but if we start moving close to 4.5% I suspect people will start talking about at what price the government can borrow to finance all these bailouts.

    Second, watch for the unintended consequences of these preferred investments. Does this effectively mean that participating banks will not be able to raise common equity – would you want to be a buyer given that the government may supercede you in the future?

    Third, for how long will these injections be enough? If banks are going to have shrinking balance sheets and balooning losses for years to come, how much more is needed?

    Fourth, you cannot buy banking stocks now for the near term dividend, only for the long term. So given what Fisher said yesterday and with a democrat admin and congress soon to arive, how confident are you that long term the megabanks will not be split up or knee capped?

    Just asking.

  30. txchick57 says:

    Where’s the guy who mocked me for buying puts on SKF when it was 200? Now buying calls for a ride back up.

    Might as well make some money before Nobama comes along and punishes me for having the nerve to profit.

    A wingnut and proud of it.

  31. josie the berry picker says:

    screw WFC what about KFC…whose helping them? finally i can get my subprime loan and buy a third car…………….

  32. Donkei says:

    There aren’t words to convey how sad it is that the liberal (classical sense)of freedom is so readily being swept away because of the fear of pain.

    The great ideal upon which this republic was founded is that individuals–not nations, not states, not governments, not investment banks–have the right to pursue their own vision of happiness. But with rights come the responsibility, including the responsibility to suffer the consequences of failure.

    Now I am being asked to forfeit some of my freedom because some others have gambled and failed. I don’t ask nor desire the government to bail me out for my failures. Why should I theirs?

    We have long been slowly creeping towards peonage, where we trade ever larger slices of our freedom, as measured by the resources we are able to secure for our survival, for instant gratification and the absence of pain.

    I don’t want to be a zombie, a walking dead, that spends my days toiling for the republic, because some few didn’t understand how to manage risk.

    Transferring insolvency to another, larger entity does not change the insolvency. It just dilutes it, and if the larger entity is one of which I am a part (the republic) then I become a slave to repay losses I didn’t cause.

    I weep for this republic. On the slim reed of a bit of trouble in a sector of human activity that lives like a leech on the productive efforts of others, we are willingly giving up the very idea that made us great.

    It may be that the banks are no longer insolvent. But now we all are.

  33. Greg0658 says:

    ps – taking the war into the streets with guns
    is counterproductive

    disaster capitalism wins via rebuilding
    joe6pack #s dwindle reducing needs on services
    (if dead)

  34. cloudy says:

    I’m don’t think I’m a wingnut. I have thought of myself as a fiscally conservative liberal, but I don’t know how to call it now. I am disappointed in both Obama and McCain and their “solutions”. I’ll probably vote for Obama, but what concerns me is the rush to liquidate the markets. What happened to all the liquidity of a few years ago? Looking a few years out, what will we be saying?

    what would I do? I don’t know. But the groupthink here is troubling. are
    I hope Barry keeps questioning everything. I sense an acceptance of government actions. Mort Sahl was wonderful because he skewered everybody. We need commentators like that.

    People are asking about the details of the Treasury /Fed plan. Well, you know
    “they” don’t even know the answers for tomorrow, let alone one year out.

    Everybody is falling into line because the government is acting. who cares what that action is, they are acting.

    I’m not against the market going up–I’m out of it–but I ask is there a limit to the government’s power in the face of the tides of the economic seas? The government doesn’t seem to think so. I think the economic forces at play are larger than the government. This is just an observation, not an idealogy.

  35. HCF says:

    NASDAQ is already down for the day? Bailout is working great! I keep getting the feeling that the PPT is a gambler on a losing streak, doubling down on every bet. I am beginning to think that Marc Faber’s assertion that U.S. government bonds should be considered ‘junk’ may come true.


  36. Philippe says:

    There is nothing that the common mortal can do when he has well thought his institutions that are:

    BIS as a regulator of the Banks prudential risks (Cook ratios and MC Donough contributions are quite lenient in retrospective as the weighing of 8% of the exposure given to derivatives equities and interest rates have proved to be a blessing to a wild behaviour) They did not foresee an « abnormal » distribution
    in the financial markets and Standard deviation of 26

    Central Banks Monetary policies and Banks supervision

    The Nikkei with his new rules is coming close to the instauration of real markets increased margins of 30 %

    Why expand so much on the shadow banking ?
    Banks and sovereign risks could have afforded a genuine collapse in few classes of assets but they may not coop with a price distortion due to leverage in derivatives, a leverage in the banking industry an assets prices distortion due to leverage.

    No one has seen these coming since , sorry those in the fields knew and since long.

  37. So now that even Volcker is calling for a considerable recession, is anybody here looking at the Asian bank bonds Faber mentioned in a recent interview? I’m interested in Singapore ones, but don’t know where to start looking. Any advice appreciated.

  38. Andy Tabbo says:

    I think Julian Robertson nailed it yesterday w/Erin Burnett interview. 80-85% of Americans are broke. That’s the crux of the issue. Consumers are tapped out and unable to service the 2007 debt levels. This is the reason the mortgages went bad. This is why spending is coming off. Bernanke and Paulson cannot force consumers to Buy Crap they don’t need with credit cards. This ship has sailed…America is in tightening/paying off debt mode, and that does not bode well for the global economy.

    Hope you sold some stocks on the open as you were advised by some of the traders on this blog.

    - AT

  39. Mike in NOLa says:

    I echo t*sphere monks query. I have been forced to buy bond forign bond funds for our IRA’s because you can’t seem to find at individual foreign bonds at either Schwab or Fidelity where we deal. And I really don’t like bond funds and their high fees.

  40. bubba says:

    pst, txchick57

    A “wingnut”, in common usage is a pejorative label we in the reality based universe pin on evolution denying, Sarah Palin is qualified to be VP chanting, bible thumping, fundamentalists.

    You don’t really want to call yourself that, let alone be proud of it. just so you know.

    goodluck trading.

  41. dmc says:

    Well, what are future generations for other than to lay on the cost of bailing out the current financial system? Happy days are here again, folks. We can party like it is 2006 all over again.

  42. dead hobo says:

    Well, what are future generations for other than to lay on the cost of bailing out the current financial system? Happy days are here again, folks. We can party like it is 2006 all over again.

    Posted by: dmc | Oct 14, 2008 10:31:40 AM


    You have described the heart and soul of supply side economics. All the laffer curve really says is “live off borrowed money that someone else had to pay back long from now.” or “Stick someone else with the check”. or “It’s good to be a parasite if enough people live it every day and the President agrees”

  43. Mark W says:

    So the big banks piss away all their capital on an elaborate derivative ponzi scheme, cry to Paulson on his Batphone, the government jacks Joe 6-Pack to the tune of trillions of dollars, and now they’re giving the banks billions in ‘capital’ with no common share hit, so the banks can give us our money back in the form of loans, that we have to repay back to them.

    That in a nutshell is why machine guns are illegal.

  44. the0ther says:

    $25 billion for citi huh? fuck those guys! send me a teeny-tiny check for like $100000 feds! i am also low on hookers and coke, just like the bankers.

  45. SPECTRE of Deflation says:

    “Some said we should just stick capital in the banks, take preferred stock in the banks,” Paulson said. “That’s what you do when you have failure.”

    - Hank Paulson, September 23, 2008

    “From the $700 billion financial rescue package, Treasury will make $250 billion in capital available to U.S. financial institutions in the form of preferred stock.”

    - Hank Paulson, October 14, 2008

  46. SPECTRE of Deflation says:

    Welcome to failure Comrades!

  47. SPECTRE of Deflation says:

    So we bailout the bankers/thieves with our taxpayer monies, and then the crooks get to loan it back to us charging interest to boot. Where the Hell do I sign up for some of that action? Just who in the Hell is supposed to buy up all the bonds the world will need to issue to actually pay for these bailouts? I’m just asking of course because I know they have a plan which includes stealing as much money as is needed to screw the little guy while the asshats ride into the Hamptons sunset!!!!!!!!!!

  48. constantnormal says:

    Interesting how the sickest banks get the biggest handouts … so much for letting the market pick the winners and losers. Now we are subsidizing the inefficient and poorly-managed banks, to allow them to steamroller those banks that are decently managed.

    All hail capit^H^H^H^H^Hsocialism!

    One would think that the nation that watched the USSR economically implode would have appreciated the merits of free market competition over centrally planned economies.

    ‘guess not.

  49. jc says:

    How long til Paulson asks for a lot more $$$?

    These big bank investments roughly offset the RE writedowns thus far and RE prices haven’t stabilized yet. These have been mostly paper, mark-to-market losses. Will the banks sit on these paper losses or sell them at 9 cents on the dollar like Lehman and ML?

    Next come real losses on defaulted morts and credit cards, how much will these go up in a bad recession?

  50. Bill says:

    The terms of this cash injection plan are a complete joke.

    The senior preferred shares will pay a dividend of 5 percent for the first five years and 9 percent after that, the Treasury said. The purchase price of the stock will be the market price of the banks’ common shares at the time of the transaction. Companies will be able to buy back the equity at par after three years.

    These banks did the financial equivalent of running over a crowd of people while driving drunk and they are rewarded by with our tax dollars for a new fancier SUV and financing terms that you and I would drool over.

    With this single stroke, I loose all respect for Hank Paulson.

  51. batmando says:

    @ Bill
    “The terms of this cash injection plan are a complete joke.”
    Like I said earlier…
    excuse me while I bend over to puke, in the course of which exposing my backside to further severe depradation.

  52. Bradsoft says:

    UK Gordon the Moron evidentally wants to takes Alan “Bubbles” Greenspan legacy and turn it into frankenstein:

    UK bailout has the requirement that the availability of lending to homeowners and small businesses will be maintained to at least 2007 levels.

    The problem the elite believe is not a bubble, but that the bubble popped. Greenspan essentially stated we can not know there is a bubble until it is revealed by its deflation, so the problem is to stop its deflation.

    The problem is Keynesian economics is moronic.

    In the end, everyone below the elite will simply be reduce to the denominator of the worst payer through subsidising the bad-debts through taxation. Socialism in its most extreme is finally revealed. No wonder they can’t expand Dubai fast enough.

  53. Walrus says:

    My understanding is that several banks tried to turn the govt. down, only to be told in no uncertain terms that they had to take the money.

    The govt. and the market as a whole cant afford to know which banks want to go it alone, least there be an MS style run on them like last week. That way everyone has to take there dough and make out like they are cool for another week or two.


  54. batmando says:

    So many negative posts here after a 10% up day. That means many still have not covered and we get bond inflow today.

    Posted by: John Borchers | Oct 14, 2008 9:01:18 AM

    2:58 pm markets turned back up – PPT to the rescue? or is it all that bond money rushing in?

  55. Vigdor Burack says:

    This American Life on NPR has 2-3 shows on the meltdown and bailout are some of the finest information out there. They are just astoundingly well done and informative. There’s also a site – – that has done a great job of capturing the problems and the alternatives. If you’re going to understand the bailout check this out.

  56. Greg0658 says:

    Vigdor checking out
    365: Another Frightening Show About the Economy

    I’m wondering who is watchin these 100s of billions of daily Commercial Paper Market loans? Can you float across the time zones and not even be in control of a stack of cash? Open in Asia … transfer to Europe … transfer to USA … transfer to Asia … repeat and reap interest from the outsiders seen here in the 1st graph in TBP

  57. BaxterJ says:

    Do you think Paulson ever thought he would have so public a role in the US media?

  58. Difficult to keep up with all the new programs they keep coming up with. It’s a real circus. I don’t think prior generations did this much hand-wringing about having a recession. Busts follow booms, that’s just the way it is, baby.