Waiting for Geithner
Feb 10, 2009
Posted by Jody Eisenman | Filed under Uncategorized
As President Obama warns of impending catastrophe if his stimulus package is not passed immediately, Wall Street waits one more day for Geithner to unveil his plan to revive the banking system and the economy. Although the details are still being speculated upon, it seems that part of the plan will include a provision for private equity capital to participate along with the government. The problem here is twofold:
1. Banks have had increasing difficulty in getting private capital to invest. The reason is that the sums required are enormous. In the case of really bad banks, it may be an insurmountable problem. For example, Citi has a current market capitalization (shares outstanding multiplied by the stock price) of about $21 billion according to Yahoo Finance. Suppose they need another $20 billion (it might be much more). What would an investor get for their money? Half the bank? The numbers just don’t seem to work based on current market prices.
2. When private equity has invested (such as Warren Buffets’ investments in Goldman Sachs and General Electric), they have invested under much more favorable terms than the government, and this was when the banks had much higher prices. Is the government going to give private equity a better deal than the taxpayers? If it does, be prepared to hear howls of protest. If they invest on the same terms, that would mean that either the taxpayers would get a better deal (which would be a lot more dilutive to the banks) or they have to persuade private equity to take a much less attractive deal, which seems unlikely to me.
If Geithner can pull this off, I will be enormously impressed. The markets did not do much today in anticipation of the plan, although many of the banks rallied. Geithner is due to speak at 11 AM. Stay tuned.
March 1st, 2009 at 4:19 am
Great work, well researched