Would you invest in a bank that's partially owned by the Bush Administration?
That's the question private investors worldwide will be exploring as they evaluate the impact of the federal government's decision to directly invest in the nation's largest banking concerns.
In return for nearly $125 billion, the U.S. Treasury is getting preferred stock in at least nine large banking companies, most of which are household names with national franchises. They include JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley.
If all goes according to plan, the federal government will make a speedy exit from these banks, probably within three to five years.
In return for cash, the government will purchase preferred stock (essentially this is a loan because such shares won't dilute the pool of common stock and usually don't come with voting rights.) These shares will carry a five percent annual dividend that rises to nine percent after five years, according to published reports.
Once their lending business stabilizes, banks will set out to find buyers to buy out the government's stake. Since the Treasury Department doesn't want to be in the business of owning commercial banks, it may sell its shares to a private investor at a slight discount, one that falls below that annual dividend rate.
Already private money is coming in to back some bigger banks. Billionaire investor Warren Buffett is putting $5 billion in Goldman, while Japan's Mitsubishi UFJ Financial Group is spending $9 billion for a stake in Morgan. Both deals were made with the expectation that the federal government would recapitalize the U.S. banking sector.
Some other lenders have not been so fortunate in wooing private capital. Bank of America, for example, had some difficulty selling nearly $10 billion in stock, at $22 per share, to private investors recently.But should the recession linger, BofA may need another $20-to-$30 billion in fresh capital, say analysts.
Still, there appears to ample amounts of private funding around. Potential buyers include: Foreign-owned banks, private equity groups, sovereign funds and wealthy individual investors. With the federal bank rescue underway, those investors are looking to pick up some bargains in the form of U.S. banks.