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Preferred @ 9% TARP?


Guest JackRiver
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Guest JackRiver

I'm trying to get my head around the suggestion that new preferreds would be issued at 9% for banks that want additional TARP money.  The obvious question is how does a 9% cost of capital promote new bank lending. 

 

The only explanation I can come up with is the banks know there mark to market values on their asset portfolios are at a huge discount to the reality of how these loan portfolios are performing.  That is to say, if you view the portfolio as a new investment that the yield to maturity based on mark to market prices is well in excess of 9% and the banks themselves know this because they are the ones that see first hand how the portfolio is performing (how the individual loans are making payments) essentially are financing today at 9% portfolios that are marked to yield many percentage points more (a lot more).  This of course would free up credit also because whatever monies were previously financing the portfolio can now finance new loans.  Is this just completely upside down thinking on my part?

 

I know absolutely nothing about banking so maybe what I'm saying is complete rubbish, but can someone here speak to this, specifically how issuing preferreds at 9% promotes new lending?  Apologies if my comments make no sense.

 

Yours

 

Jack River

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I asked myself this question with all of the involuntary TARP capital that yields 5%.  It could have the effect of weighing on the NIM (maybe only slightly though depending on the percent that TARP is of their capital) of all of the TARP banks and especially the ones with the 9% preferred.

 

The cost of funding for non-TARP funds should be down in the 2% range now it seems. 

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Not an expert here, but banks can borrow at the Fed window based on their capital, so they are able to leverage the preferred.

 

The earnings on the leveraged funds should more than offset their cost of capital.

 

Banks average about 10x leverage, so paying 9% (after tax) is high, but not unreasonably so.

 

Many banks issued public preferreds at ~8%

 

 

 

 

 

 

 

 

 

 

 

 

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Guest JackRiver

Ahhh.  Okay, I'm kind of following you (the fed stuff).  Please, if anyone can add more understanding it would be much appreciated. 

 

Yours

 

Jack River

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