via Telegraph UK
The approximately $138 billion aid package on Thursday for Bank of America — including injections of capital and absorbed losses — as well as a $300 billion package in November for Citigroup both represented displays of financial gymnastics aimed at providing capital without appearing to take commanding equity stakes.
Treasury and Fed officials accomplished that trick by structuring the deals like insurance programs for big bundles of the banks’ most toxic assets.
Instead of investing tens of billions of taxpayer dollars in exchange for preferred shares in the banks, which has been the Treasury Department’s approach so far with its capital infusions, the government essentially liberated the banks from some of their most threatening assets.
The trouble with the new approach, analysts say, is that it is likely to conceal the amount of risk that taxpayers are taking on. If the government-guaranteed securities turn out to be worthless, the cost of the insurance would be much higher than if the Treasury Department had simply bailed out the banks with cash in the first place.
Christopher Whalen, a managing partner at Institutional Risk Analytics, said the approach also covers up the underlying reality that the government is already essentially the majority shareholder in Citigroup.
“There’s nobody else out there to invest in them,” Whalen said. “We already own them.”
Ben Bernanke, chairman of the Federal Reserve Board, outlined the elements of what could become the Obama administration’s new approach to bank rescues in a speech on Monday. Continue reading