World markets continue to gyrate as the U.S. Department of the Treasury begins to deliver billions of dollars in exchange for preferred shares in nine top U.S. banks and starts signing up regional institutions. Insurers may be next in line: Prudential and MetLife are reportedly lobbying hard to be included in the program, and the Financial Services Roundtable sent a letter to Neel Kashkari, Treasury’s interim assistant secretary for Financial Stability, appealing for an open tent approach.
While the Emergency Economic Stabilization Act of 2008, also known as EESA, includes but isn’t limited to banks, credit unions, brokers, dealers, and insurance companies, only U.S. banks and S&Ls are covered by Treasury’s cash-for-stock Capital Purchase Program, or CPP. Steve Bartlett, president and CEO of the Financial Services Roundtable, told Kashkari: “This is a global crisis and to not recognize the U.S. firms controlled by foreign banks or companies would create further impediment to the market’s recovery. Further, the institutions that are excluded play a vital role in the U.S. economy.” The Roundtable urges Treasury to invite all of the excluded, including automakers, to the CPP party.
Treasury seems disinclined to include the automakers, since they already got $25-billion under EESA. But press reports suggested officials were ready to cut in the insurers.
The problem with CPP is that there is no requirement for the participants to increase, resume, or maintain their lending. Treasury Secretary Henry M. Paulson has pleaded with banks to lend, but such pleas are untethered to the program, and there are mixed signals—Treasury officials have been whispering in bankers’ ears about buying up weaker banks with their CPP money. PNC Financial took the hint, announcing last week an agreement to acquire National City Corp. in a stock deal worth around $5.2 billion. PNC will also issue $7.7 billion of preferred stock under CPP. Much as Paulson asks for lending, chances are he will see acquiring and improving Tier 1 capital instead.
“With the tacit understanding that larger banks will receive substantial capital infusion from the TARP program for industry consolidation purposes, the primary mandate of increasing lending into the financial system will take a backseat,” warns John Jay, senior analyst at Aite Group. “Resources at large firms that would otherwise be deployed for lending activity will now go to devising short lists of possible targets. As a consequence, smaller institutions will bear the brunt in shareholder wealth destruction and employee layoffs. Any increased lending—the purpose of creating the TARP program—will be pushed further out into the future.”
