Bernanke Burns More Tax Payer Billions in Banks Capital Assistance Program

Bernanke has fired yet another misguided missile to stabilize the banking system. His new program is called the Capital Assistance Program and supposedly it will restore confidence in banks and get them to lend. Here is a description of the program:

The purpose of the CAP is to restore confidence throughout the financial system that the nation's largest banking institutions have a sufficient capital cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers.

Terms

• Capital provided under the CAP will be in the form of a preferred security that is convertible into common equity at a 10 percent discount to the price prevailing prior to February 9th.
• CAP securities will carry a 9 percent dividend yield and would be convertible at the issuer's option (subject to the approval of their regulator).
• After 7 years, the security would automatically convert into common equity if not redeemed or converted before that date.
• The instrument is designed to give banks the incentive to replace USG-provided capital with private capital or to redeem the USG capital when conditions permit.
• With supervisory approval, banks will be able to request capital under the CAP in addition to their existing CPP preferred stock.
• With supervisory approval, banks will also be allowed to apply to exchange the existing CPP preferred stock for the new CAP instrument.

CAP Facts

1) Amazingly CAP fact sheet states the securities will yield a 9% dividend. However, any bank troubled enough to need the CAP is likewise too troubled to be able to pay a 9% dividend. Banks can't get a 9% return on borrowed money everyone knows it. Instead, expect preferred shares to be converted to common at inflated prices.

2) Digging a bit deeper into the fact sheet we see the " Conversion price is 90% of the average closing price for the common stock for the 20 trading day period ending February 9, 2009. "

Think February 9 was selected at random? Think again. The first box in the charts below is the 20 days ending February 9. Compare to what has happened since.

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