The New York Times “New Terrain for Panel on Bailout” reports on a secretive five member panel that decides the winners and losers in the TARP. Banks apply with a two page form which is rated 1 to 5 by their primary regulator. Ranks 1 and 2 are assured of participation and rank 5 is automatically rejected as too weak. The committee of five, along with a small support staff of 40, determines the fate of the others. Treasury Secretary Paulson is refusing to honor his promise of transparency by not disclosing the selection criteria and goals.
The track record of the TARP is already clear, and it has nothing to do with the stated goals of recapitalizing healthy banks to promote lending and mortgage modifications. Though the stated goals might be a side dish, the main course is to consolidate the banking systems into stronger hands. The big four (BAC, C, JPM and WFC) get their pick of weaker regional banks, and the stronger regional banks (BBT, FITB, KEY, PNC, RB and USB) get their pick of the rest. And Paulson wants to get the job done before the Bush Administration loses power.
Congressman Barney Frank feels duped. He and his fellow Democrats see the TARP being used to support mergers, dividends and executive bonuses. The money goes out as fast as it comes in without any benefit to businesses and consumers. They are not convinced that a stronger banking system will trickle down benefits fast enough. Paulson’s need for urgency is becoming even more acute as Frank is scheduling oversight hearings this month.
What is the investment angle of the backlash? Mergers and executive bonuses surely won’t be curtailed. Banks are already claiming they need to pay bonuses for competitive reasons. The angle I see is the possible temporary reduction or elimination of dividends, which might
even include preferreds and deferrable bonds. This could create a buying opportunity for patient investors. Remember how the GSE preferreds collapsed after the dividends were eliminated.
Disclosures: Author is long BAC, C, FITB, KEY and WFC.
