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Most big banks on U.S. capital-infusion list see shares soar

October 14, 2008 |  2:17 pm

Big-bank investors today gave a ringing endorsement to the Treasury’s plan to buy stakes in the companies.

That may make taxpayers even more suspicious about these deals. If there was supposed to be some pain involved for shareholders in this partial nationalization, it's not showing up in the stocks. Just the opposite.

Of the nine major banks expected to get the largest cash infusions under the $250-billion, industry-wide buy-in plan, most saw their shares surge today -- the third straight advance -- even as major market indexes slipped.

Bank of America Corp. jumped $3.74, or 16.4%, to $26.53. Morgan Stanley rose $3.84, or 21.2%, to $21.94; Wells Fargo & Co. gained $3.12, or 10.3%, to $33.52.

Paulsonoct14_2 Bank of New York Mellon Corp., Citigroup Inc., Goldman Sachs Group Inc., Merrill Lynch & Co. and State Street Corp. also were up sharply.

Of the nine, only JPMorgan Chase & Co. was lower, down $1.28, or 3%, to $40.71. That could reflect investors’ caution ahead of the company’s quarterly earnings report, due on Wednesday.

The Treasury’s plan, as championed by Secretary Henry M. Paulson, is to inject capital via the purchase of non-voting preferred stock that will pay the government a 5% annualized yield for the first five years.

So Uncle Sam is settling for half the 10% yield that Warren Buffett demanded to make a $5-billion preferred-stock investment in Goldman Sachs last month.

The government, of course, has a different agenda than Buffett. The Treasury is trying to ease the credit crunch by bolstering the banks; demanding a high return on the new capital would just penalize the institutions.

By boosting banks’ capital, the plan is supposed to 1) make the institutions more confident about lending new money in the economy and 2) make them more confident about extending credit to each other.

Any bank getting a capital injection has to agree to certain limitations on executive pay, but those restrictions don’t look particularly onerous. The banks also will grant the Treasury warrants to buy common stock, which ultimately will dilute current shareholders' stakes.

But for now, concern about dilution is taking a back seat to the sense of relief that this partial nationalization provides: Uncle Sam's money on the balance sheet may not guarantee a bank's long-term success, but it makes failure far less likely. That's a big help to Goldman and Morgan, in particular.

Read the details of the Treasury’s plan here.

Photo: Treasury Secretary Henry M. Paulson today. Gerald Herbert / Associated Press

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