Paulson’s Plan Ready For Primetime

What took so long? Hank Paulson is a banker...we know because he helped take Webvan public. Webvan was ill-conceived, much like some of the stuff Hank has come up with in recent weeks. But thanks to Warren Buffett and the Europeans, along with a little American ingenuity, we finally have cobbled together a workable plan. Or at least presentable.

Paulson is beginning to look like Frankenstein, thanks to a lack of sleep, and this plan hopefully combines the best parts of what we have seen over the past few weeks.

The Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan, people said. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Wells Fargo is to get at least $20 billion, Goldman and Morgan Stanley will each get $10 billion, and State Street and Bank of New York will get about $3 billion each, people said.

The government will obtain its stakes with a type of security designed not to dilute the value of common shares.

None of nine banks getting government money was given a choice about it, said people familiar with the plans. All of the banks involved will have to submit to compensation restrictions as mandated by Congress, people said. Bloomberg

All sides are trying to spin the dilution issue here, the terms should become public tomorrow morning. What interest rate will the preferred dividends pay? And how will it impact the bank's unsecured debt?

Chances are it will be closer to 5% than the 10% Warren Buffett wrangled out of GE and Goldman in recent weeks, but many hedge funds are now comparing the big banks to Freddie and Fannie of 2005. Not good for you folks working there..sure you have a job, but.....

Whether or not that is fair is another question, but it should be noted that various financial indices and ETF such as the KBW Bank Index, Nasdaq Bank Index and Financial Spyder ETF (XLF-AMEX) all trailed in Monday’s advance. True, the AMEX Broker-Dealer Index ($XBD) rallied 20%, but they might need to put a bullet in that archaic index.

Smaller banks will also have access to the money, a shame for well capitalized banks that will have to now compete with weaker rivals that will be able to shore up their finances.

The Nikkei is up 13% on Tuesday thanks to the measures, and investors today were quick to bid up equities now that the long anticipated recapitalization of the financials is complete. I would have preferred mutual funds, private equity or sovereign wealth funds to Hank Paulson opening up our checkbook, but he blew that opportunity months ago.

And here we are.

Beaten down energy and material stocks were the place to be in the U.S. on Monday; copper traded lock limit up in Shanghai after sliding for weeks on end. Several Australian bank stocks were performing natural resource equities in early trading down under, but not by material amounts.

StockJockey’s worldwide are trying to figure out what sectors to buy, and depending on the term sheet we see tomorrow, bank stocks might remain the laggards as the tape pushes higher on continued relief. What are the terms? How will Goldman’s bonus pool be impacted? How low will the ROIC’s/ROE’s fall at the chosen nine banks?

And investors might want to temper their expectations. This market should get awfully boring soon, at least compared with the past few months.

And while I am at it, I might add my favorite saying.

Be careful what you wish for.

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U.S. Treasury Said to Invest in Nine Major U.S. Banks
Bloomberg

U.S. Investing $250 Billion in Banks
NY Times

Asian Stocks Gain on Bank Stakes Plan; Treasuries, Yen Decline
Bloomberg
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