Sunday, January 11, 2009

TARP is CRAP

UPDATE


Another I told you so from the King. Outgoing President Bush is trying to get the last pennies out of the TARP program. This is needed to keep the zombie companies on wall street open. Of Course, President Obama has to support this so he can get his own plan through. The last Tarp money was used to pay salaries and bonuses and help a few mergers for Bank of America.

By the way, we all noticed who President elect Obama was sadwiched between at the President luncheon. Need I write more about that.


Dear Squires and Princess:
Today's blog is a short and sweet lesson on the Troubled Asset Relief Program (TARP) and the Capital Purchase Program for Banks. These two programs were put in place by Ben "Bankrobber" Bernake and Henry "J Edgar" Paulson to socialize the United States Banking system under the pretence of saving it.
Under the supposed voluntary TARP program, participating banks sell newly issued, non-voting senior preferred shares to the U. S. Treasury in exchange for an amount of capital equal to at least 1 percent of a bank’s “risk-weighted” assets and no more than 3 percent of those assets. The shares pay an initial annual dividend of 5 percent for the first 5 years, and then 9 percent, giving banks an incentive to raise more money to buy back the shares from the Treasury quickly.
The banks also give Treasury warrants or rights to buy shares of common stock in an amount equal to 15 percent of the preferred stock investment. The warrants are good for 10 years, and Treasury will not exercise any voting power.
To break it down, Banks make up new unissued stock to borrow fresh printed cash and dilute existing shareholders.
To date, 53 banks have received $161.5 billion, with at least 25 more being approved for $6 billion more.
There is only one major problem with this whole ball of wax. In four months at the end of first quarter 2009, many of these same banks will realize they cannot pay back this cash at 5% in five years because we are in a period of recession and deflation and that interest rate is too high. AIG figured this out in 45 days and doubled its amount borrowed.
In order for a Bank to stay profitable, it must lend out money at least 300 basis points higher than its cost of funds.
Unfortunately, consumers are not borrowing at any interest rate so the circle of consumption and debt is broken, requiring another bailout.
This whole situation is fearful, unless you are a client of King George Advisors. I saw this storm coming and my team is still ahead of it. The smart money is with us.
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