What The New Bailout Plan Will Do
Futures, already up overnight, moved up again after 8 am ET as details were presented about the latest government rescue effort.
All of the major European economies, and the U.S. now have a similar plan.
The US government will 1) take a $250 billion equity stake in the form of preferred shares which cannot be redeemed for three years, 2) guarantee bank-to-bank lending, and 3) remove deposit insurance levels for non-interest bearing accounts.
The $250 billion investment will include four banks (Citi, JP Morgan, Bank of America, Wells Fargo), 2 brokers (Goldman, Morgan Stanley), and 2 processing banks (Bank of New York, State Street), and other smaller banks.
The investment of preferred shares on an equal level to existing preferred shareholders preserves the investment of those shareholders. If the rescue plan succeeds, the shares can be sold for more than the government paid, which would make a profit for the government and shareholders.
- US Details Revised Bank Rescue Package
The hope is that this will result in a decline in LIBOR rates and elimination of counterparty risk. Several LIBOR rates are lower, CDS rates are lower across the board, while commodities are higher. In addition, the Fed will begin funding purchases of commercial paper on October 27th.
What happened to all the toxic mortgages? They're still there.
1) Financials are notably higher: Citi up 15 percent, Morgan Stanley up 19 percent, Goldman Sachs, Credit Suisse and Deutsche Bank up 12 percent. Some regional banks are even higher: KeyCorpup 21 percent, Regions Financial up 20 percent. Citigroup upgraded most of their banks to a Buy.
2) Johnson and Johnson beat estimates and raised guidance for the remainder of the year
3) Diversified manufacturer Ingersoll Rand down 8 percent as they lowered guidance for the third quarter, saying the economic slowdown has been more significant than expected.
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