U.S. Treasury to invest in `healthy’ banks, Neel Kashkari states

October 13, 2008 by · Leave a Comment
Filed under: Industry News 

I wonder how Neel will define “healthy”. Last time I checked, all major commercial and investment banks were leveraged between 15-40 for every dollar of deposit. Along with that fact, no one is talking about the elephant in the corner of the room…..Derivatives. With the estimates between $516 trillion and $1.44 Quadrillion outstanding, I am not sure how they are going to work those out.

When Lehman, Bear Sterns and Fannie/Freddie failing or being nationalized, that has triggered quite a bit of these instruments to go from notional value to actually value. How is going to pay these out or will the counter-parties default? That will lead to a larger loss of confidence in the market and will continue to put pressure on lending. If the government backs these unregulated bond insurance contract then it puts its own credit at risk. Marc Faber said the next bubble to burst will be U.S. treasuries once interest rates have to rise to combat inflation and then we are in a situation where we can not keep up with the ballooning interest payments. Something has to give at some point, its like a full-time job keeping up with all these developments that have various implications.

News Piece:

Neel Kashkari, the U.S. Treasury official overseeing the $700 billion rescue of the financial system, said government equity injections will be aimed at “healthy” firms.

“We are designing a standardized program to purchase equity in a broad array of financial institutions,” Kashkari, who heads the department’s Troubled Asset Relief Program, said in a speech in Washington. “The equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions.”

U.S. officials are hurrying to address frozen credit markets that led France, Germany, Spain, the Netherlands and Austria to agree to commit $1.8 trillion to guarantee interbank loans and take equity stakes in banks. Buying shares of financial institutions has become the latest focus of Treasury Secretary Henry Paulson’s rescue plan.

“While the U.S. tends to shy away from nationalizing or even partially nationalizing its financial institutions, it would appear that it has no choice but to follow suit,” Win Thin, a senior currency analyst with Brown Brothers Harriman & Co. in New York, said in a research note today.

Paulson and Federal Reserve officials met today with executives from financial companies to discuss the government plan to restore confidence in credit markets, the Treasury said. The Standard & Poor’s 500 Index soared 11.6 percent, the biggest rally in seven decades.

`Multiple Directions’

Kashkari said the Treasury will “attack” bad debt clogging financial markets from “multiple directions.” His remarks gave the first detailed progress report on the operations of the financial rescue plan since President George W. Bush signed it into law on Oct. 3.

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