Markets

With Bailout In Sight, Big Private Investors Back Banks

By Robert Reed

Updated on: September 29, 2008 / 12:54 PM EDT / MoneyWatch

While the proposed $700 billion, taxpayer-backed rescue of the economy is grabbing the nation's undivided attention, private investors are pouring billions into the U.S. financial system and backing banking groups poised to survive the current crisis.

Right now, an estimated $40 billion in outside money is being pumped into some of the country's biggest banking concerns. They include:

Up to $10 billion invested in Goldman Sachs from billionaire Warren Buffett in return for an undetermined equity stake in the former investment banking giant, which is converting to a traditional bank holding company.
Up to $9 billion in Morgan Stanley from Mitsubishi UFJ Financial Group in return for an up to 20 percent stake in Morgan, which is also becoming a banking group.
An estimated $11.5 billion in fresh investor money in JP Morgan Chase, which recently acquired the assets of distressed Washington Mutual. Some of that funding will be used to shore up JP Morgan's capital base.
An estimated $10 billion in fresh capital is being pumped into Citigroup, which is acquiring assets of Wachovia. Citigroup is also building up capital levels by cutting its dividend, while also issuing new shares to investors.

Some argue that this influx of private investment is an indication that the publicly-backed $700 billion bailout isn't necessary. Or at least doesn't have to be as large as the U.S. Treasury proposed.

More likely, however, this rush of cash proves that private investors are willing to take calculated bets on the U.S. financial system, provided the federal government acts as a safety net for risky investments.

For example, the Federal Deposit Insurance Corp. is taking responsibility for billions in toxic mortgages so JP Morgan and Citigroup can take over the operations and consumer deposits of WaMu and Wachovia, respectively.

In addition, its unlikely that Buffett or Japan's Mitsubishi would have doled out their grub stakes if the government bailout was not taking shape. Once a rescue is passed into law, Treasury will set out to acquire billions in bad commercial paper from Goldman, Morgan and other lenders. Without those bad assets, banks can return to the business of commercial and retail lending, which will help the economy grow.

Where is this infusion of private equity coming from? Some is rolling in from wealthy individuals and their companies ala Buffett's Berkshire Hathaway; while foreign investor groups, such as Mitisubishi, are being heavily courted (for example, Spain's Banco Santander SA was looking at Wachovia) . In addition, asset managers--such as institutional investors, pension funds and other large money pools--are being asked to join in the JP Morgan and Citigroup acquisition efforts.

Without the promise of a bailout, some major institutions--including IndyMac and Lehman Brothers--didn't have a prayer of being recapitalized by the private sector and died.

There has always been a ton of private capital out there. In 2006, there was an estimated $55 trillion in the asset managers' pockets worldwide (although that amount has been diluted recently due to financial sector and market turmoil.) But when the financial system began to crumble under the colossal weight of bad subprime mortgages and other ailing commercial debt, private money managers ran for cover.

Now, those same groups are slowly inching back into the marketplace. Once Uncle Sam's federal bailout is passed, look for more private sector investors to emerge with check books in hand.