Monday, February 23, 2009

Prepare for what you Believe

In a joint agency statement, Federal financial experts stressed that banks are well capitalized. For now. Yet the new plan prefers for "a more challenging economic environment." You don't plan for that unless there's a chance it's coming.

The announcement, preceding the launch of the Capital Assistance Program (CAP) on Wednesday, says that things could get worse. CAP will allow firms to take on mandatory convertible prefer ed shares form the government. The plan prefers that firms seek private capital but provides government money as a backstop.

Today's announcement seems caught between announcing a new government capital injection and trying to shore up confidence. Unlike TARP, the money is not be rushed out the door and may be vetted more clearly. According to the statement,

Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated. The customers and the providers of capital and funding can be assured that as a result of this program participating banks will be able to move forward to provide the credit necessary for the stabilization and recovery of the U.S. economy. Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.

Two things to note, one the government is preparing for a situation worse than current estimates. Estimates have changed very quickly for major industries lately (GM's latest sales projections come to mind). Second, the statement skews against bank nationalization but doesn't rule it out.

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