Money & Investing - Banks.com

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Back in February, there was talk of a deal in which Citi could issue shares to the government in order to raise capital. Very little has been heard on the subject since, and little has been done to make it happen. Until now. Today, Citi announced that it would allow the government to be the company’s biggest investor. The Street reports on the basics of the agreement:

Under the agreement, announced in February, the Treasury Department will exchange a portion of its preferred stake — roughly $25 billion — for interim securities and warrants. The government will also exchange the remaining preferred shares into trust preferred securities, Citi said.

After the exchange, the government will have roughly a 34% stake in Citi.

Citi’s conversion, first announced in February, is expected to boost the struggling financial institutions tangible common equity level by $61 billion and its Tier 1 capital by $64 billion.

The move should make Citi extremely well capitalized, helping the embattled company remain afloat — and even somewhat competitive. The announcement comes one day after the Treasury Department cleared 10 banks to repay their TARP funds. Citi, however, was not one of the named banks. The 10 banks cleared to exit TARP are:

1. Morgan Stanley
2. American Express
3. Bank of New York Mellon
4. BB&T Corporation
5. Capital One Financial
6. JP Morgan Chase
7. Northern Trust
8. State Street Corporation
9. U.S. Bancorp
10. Goldman Sachs

The fact that Citi is not on that list, nor Bank of America, does not come as a huge surprise to most people. However, over all the fact that many of the banks are feeling secure enough to pay back the money they owe taxpayers — as well as efforts to capitalize other banks (even though the government will become a major investor) — is encouraging. There are hopes that this will help the stock market eventually. Right now, though, this morning’s strong start for the Dow and the S&P 500  appears to be waning.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Bank stocks are leading a rally this afternoon on the U.S. stock market. The Dow Jones Industrial Average (^DJI) is up more than 200 points after yesterday’s below-8,000 close right now as the financial sector cheers the rumors that the government is committed to propping up the banking system. Indeed, there are plenty of rumors circulating about the possibility of infusing Bank of America with another $200 billion, as well as making sure that bank rescue is a part of the latest economic stimulus legislation. (The bank rescue in the U.S. is being greeted completely opposite to the reception the U.K. bank bailout has met.)

Even thought the stock market tumbled dramatically earlier today, there is confidence that the government won’t let the banking sector fail, and that is driving investors to put their money back into equities. CNN Money reports that the fact that many stocks have been oversold is also contributing to the rally:

“It’s an oversold rally after days of selling,” said Joseph Saluzzi, co-head of equity trading at Themis Trading. He said that the market action so far in 2009 is likely to continue throughout the next few months. “We’re going to see this kind of thing, where you have negative headline after negative headline, until one bit of good news comes out that squeezes the short-sellers.”

Billions (maybe trillions) for banks. Not so much for taxpayers.

Even as the government prepares to spend billions more — ultimately it is conceivable that bank rescue will run in the trillions — on rescuing the large banking entities that made poor decision, it plans to offer a sop to American taxpayers: A $500 tax credit. Many see this tax credit is mostly a gesture meant to placate the masses angry at watching their hard-earned tax dollars go to the folks at the top of the economic food chain. $500 over two years isn’t nearly enough to make a real difference to most taxpayers. Indeed, the thinking is that if we are going to have to pay all this economic stimulus back with interest, the money should be given directly to the taxpayers, rather than to big banks.

After all, the banks haven’t proved that they are any better at financial decision making than the rest of us.

Stocks started off today strong, thanks to some help from various attempts to shore up the economy and boost confidence in the market. Or at least boost confidence in the financial sector of the stock market. Right now, it appears as though Bank of America is going to be in a better place, thanks to the bailout money it is about to receive from the government. This, along with the news that Citi plans to split itself in two in an effort to salvage its balance sheet, is providing some optimism for investors on the stock market. Is now the time to invest in banks — while they’re at rock bottom prices?

But that’s not all the “good” news for the economy and the stock market from this week:

• Congress is okaying the release of the rest of the TARP funds approved last fall. The money is supposed to also help the regular folks — not just the big banks. But we’ll see how that really turns out.
• Economic stimulus legislation has been presented to the public. This legislation looks promising in some areas, but not so great in others. It is nice that infrastructure and education and states are likely to get some support. But tax cuts at a time of increased spending does not seem like the best idea. But it’s the idea that is politically popular right now. (At least, until it becomes evident that taxes will have to go up again.)

In any event, some are predicting the light at the end of the financial mess tunnel. I’m not sure that it’s not an oncoming train…

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.