The federal government's plan to make $250 billion in equity investments in the ailing bank sector is being lauded by experts and industry professionals for one simple reason: It gets more bang for the buck.
Initially, the government had intended to use the entire $700 billion in the financial rescue package recently enacted by Congress to buy the bad mortgage-related assets that have clogged up banks' balance sheets and frozen up the credit markets. Instead, the Treasury will have a significantly lower amount of up to $450 billion for those purposes, once it receives $250 billion worth of preferred stock from the banks, which reportedly include Bank of America (STOCK QUOTE: BAC), JPMorgan Chase (STOCK QUOTE: JPM), Citigroup (STOCK QUOTE: C),Wells Fargo (STOCK QUOTE: WFC),Morgan Stanley (STOCK QUOTE: MS), Bank of New York Mellon (STOCK QUOTE: BK) and State Street (STOCK QUOTE: STT).
But, by and large, the financial industry is not worried about holding onto a portion of those assets, if it means getting access to fresh capital. And from the regulatory side, pouring hundreds of billions of dollars into equity stakes makes more sense than buying troubled assets and leaving banks to fend for themselves, experts say.It all comes down to a simple ratio: Every dollar invested in troubled assets equates to one dollar, unless the assets appreciate, but every dollar put toward a capital infusion has ten times as much value through leverage. The funds can be used to expand banks' business, free up credit markets and provide a cushion for immediate losses on bad loans. In addition, bank stocks have already surged in market value on word of the revised plan, and taxpayers' preferred shares will pay healthy dividends as well.