Section 128 of the Bailout accelerates the section of the Financial Services Regulatory Relief Act of 2006 which sets the reserve ratio on transaction accounts to zero to kick in immediately.
SEC. 128. ACCELERATION OF EFFECTIVE DATE.
Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461 note) is amended by striking ‘‘October 1, 2011’’ and inserting ‘‘October 1, 2008’’.
Now, I wondered why they would do this. Apparently they are really trying to free up money for these banks.
But then I remembered that Goldman Sachs and Morgan Stanley just became commercial banks. Then I also remembered that JP Morgan just bought WaMu, with its 188 billion in deposits, for less than 2 billion.
http://news.yahoo.com/s/nm/20080926/ts_nm/us_washingtonmutual_jpmorgan_newsFDIC Chairman Sheila Bair said the bailout happened on Thursday night because of media leaks, and to calm customers. Usually, the FDIC takes control of failed institutions on Friday nights, giving it the weekend to go through the books and enable them to reopen smoothly the following Monday.
Washington Mutual has about $307 billion of assets and $188 billion of deposits, regulators said. The largest previous U.S. banking failure was Continental Illinois National Bank & Trust, which had $40 billion of assets when it collapsed in 1984.
JPMorgan said the transaction means it will now have 5,410 branches in 23 U.S. states from coast to coast, as well as the largest U.S. credit card business.
It vaults JPMorgan past Bank of America Corp to become the nation's second-largest bank, with $2.04 trillion of assets, just behind Citigroup Inc. Bank of America will go to No. 1 once it completes its planned purchase of Merrill Lynch & Co.
The bailout also fulfills JPMorgan Chief Executive Jamie Dimon's long-held goal of becoming a retail bank force in the western United States. It comes four months after JPMorgan acquired the failing investment bank Bear Stearns Cos at a fire-sale price through a government-financed transaction.
On a conference call, Dimon said the "risk here obviously is the asset values."
He added: "That's what created this opportunity."
JPMorgan expects to incur $1.5 billion of pre-tax costs, but realize an equal amount of annual savings, mostly by the end of 2010. It expects the transaction to add to earnings immediately, and increase earnings 70 cents per share by 2011.
It also plans to sell $8 billion of stock, and take a $31 billion write-down for the loans it bought, representing estimated future credit losses.
The FDIC said the acquisition does not cover claims of Washington Mutual equity, senior debt and subordinated debt holders. It also said the transaction will not affect its roughly $45.2 billion deposit insurance fund.
So, it looks like Section 128 just allowed this bank, JPMorgan, to basically have a ZERO reserve ratio on transaction accounts, meaning every single dollar they take in can then be used to lend money, instead of the 10% of the deposit required to be on reserve pre-bailout. They just gained access to a lot more of that liquidity stuff. Good thing the FDIC stepped in when it did to take over WaMu, which came to a complete surprise to the board of that bank, when it did. :sarcasm: Not to mention, senior debt, subordinated debt holders, and WaMu equity was wiped out.
Did the Treasury Department's announcement that it would insure money market mutual funds have anything to do with the bank runs?
It also looks like newly minted commercial banks like Goldman Sachs and Morgan Stanley get to also take part in the accelerated application of the 0% reserve ratio and lend out every single dollar they take in. :wtf: I thought the problem with these investment banks were that they were highly leveraged to begin with? (the day after the Feds made them commercial banks, a Japanese bank took a 20% stake in Morgan Stanley.) Why would we allow them to hold zero reserves on transactional accounts after all of this chaos?
It also looks like to me, that JPMorgan, Bank of America, etc just bought themselves a bigger Paulson Bailout (because Section 101(e) which says that "troubled assets" acquired due to an acquisition are not subject to the price restrictions and may be purchased above their current value.
Section 101 (e)
This subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of as sets from a financial institution in conservatorship or receivership, or that has initiated bankruptcy proceedings under title 11, United States Code.
So Bank of America, JPMorgan, Morgan Stanley, Goldman Sachs, will clearly be big beneficiaries of this plan.
Then there's Wachovia. The CEO of Wachovia was hired the same day (July 9, 2008) he resigned from the Treasury Department. He's also a Goldman Sachs guy who also, like Paulson, worked in the Chicago office. Now this guy will be negotiating with his friend, Paulson, at the Treasury Department, to unload the 122 billion in "troubled assets" his company holds. Maybe they won't need that merger if this bailout plan goes through.
http://money.cnn.com/news/newsfeeds/articles/djf500/200809261420DOWJONESDJONLINE000690_FORTUNE5.htmWachovia ousted its long-time CEO Ken Thompson in July and replaced him with Bob Steel, a former undersecretary at the U.S. Treasury and a veteran Goldman Sachs Group Inc. (GS) banker. The firm has also announced a new chief financial officer as well as a new chief risk officer.
While CEO Steel has worked quickly to reassure investors and has promised to make the Charlotte firm more transparent, Wachovia's shares have continued their wild ride as investors appear unsure what to make of Wachovia's long-term prospects. The shares dropped below $10 in July, and did so again Friday.
http://en.wikipedia.org/wiki/Bob_SteelRobert Steel had joined Goldman Sachs in 1976 and served in the Chicago office until his transfer to London in 1986. In London, he founded the Equity Capital Markets group for Europe and was extensively involved in privatization and capital raising efforts for European corporations and governments. He later assumed the position of head of Equities for Europe. In 1994 he relocated to New York and served as head of the Equities Division from 1998 to 2001, until his appointment as a vice chairman of the firm. In 1988 he became a partner and joined the Management Committee in 1999. Upon his retirement from Goldman Sachs on February 1, 2004, he assumed the position of advisory director for the firm and then senior director in December 2004.<1>
Upon his retirement, Steel became a senior fellow at the John F. Kennedy School of Government at Harvard University, serving from February 2004 to September 2006.
Then, in 2006, Steel was appointed Under Secretary for Domestic Finance within the United States Department of the Treasury. He served in this position from October 10, 2006 - July 9, 2008On Wednesday July 9, 2008, Robert Steel resigned as Undersecretary and was named President and CEO of Wachovia.<2>
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