Wow. Our experiment is off to a great start—let's see if we can finish it off sooner than expected.
MORE BAILOUT....According to the fact sheet accompanying the new bailout plan, all banks with assets over $100 billion will be required to undergo a "comprehensive stress test" to make sure they're solvent enough to continue lending even in the face of future losses. This applies to about the 20 biggest banks in the country. So what happens then?
While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital.
....Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution’s stock price as of February 9, 2009.
Well, that's clear as mud, isn't it? After a thorough investigation that will supposedly force banks to face up to their losses (but not in an "overly conservative" way), they'll then be available for government bailout money. Who qualifies? Apparently everyone. What are the terms? We'll make that up on a case-by-case basis. How long will banks continue to be bailed out? No telling. What restrictions will be placed on bailed-out banks? None, apparently.
I'll wait for smarter people than me to explain this stuff further, but at first glance it sure looks an awful lot like "trust us." But we'll see. A big part of the Geithner plan is a promise to "improve public disclosure by banks," which will "include measures to improve the disclosure of the exposures on bank balance sheets." If that's done honestly, there are likely to be quite a few banks that need more than just a "preferred security investment" from the Treasury. Stay tuned.