The Stimulus Might Actually Kill Banks Due to a Dodd Amendment?

Here we go again with more incompetence from the Head of the Senate Banking Committee. I think this may make that sweetheart Countrywide mortgage scandal look like small potatoes.

As part of Senator Dodd’s last-minute amendment about executive compensation, he put in a provision making it easier for the banks to pay back the TARP money to the government.
This is directly from the bill signed into law:

“…the Secretary shall permit a TARP recipient to repay any assistance previously provided under the TARP without regard to whether the financial institution has replaced such funds from any other source…”

Under the old TARP rules, a bank could only give the money back after it had replaced it with other capital, presumably raised from private investors. With the above words, that requirement is gone.

The problem is that Dodd's little claw-back add-on may have changed the nature of the TARP funds. These funds lost their "permanent" status which means that ratings agencies can't use that money to determine capital ratios. The capital ratios are important because the bank needs to maintain them at a certain level or they become insolvent.

Or in a best-case scenario the bank has a endure a credit downgrade which will make their borrowing costs go through the roof. However, if their debt rating is cut by too many levels then they might not be able to borrow at a low enough interest rate in order to stay in business. They might even have covenants on their debt like AIG had that if there rating drops to a certain level you have to close up shop.

So it seems that due to Dodds apparent screwup he may have single-handedly invalidated the TARP moneys ability to keep some banks solvent. And this guy heads the *banking* committee? And this mess-up was added to a last minute "claw-back the bonuses" amendment? I think he may have just clawed-back the ability for the US financial system to stay solvent and thus keep us out of Great Depression 2.

Then you notice that Citi suddenly had to rush back to the government so that they could raise equity to keep their capital ratios at the same level as they were before. I know that they took $45 billion in TARP money and I see that this preferred stock to common stock trade-in scheme is supposed to raise that exact same amount.

If the government converted $45 billion of preferred shares into common stock, Citigroup's ratio would rise to about 3.9 percent from 1.5 percent. There is no consensus on what ratios banks need, but many analysts prefer 5 percent or more.

The thing is that they had that $45 billion in TARP money already on their books but Dodd made it so that it doesn't count toward their credit rating. I think Citi may have rushed into this deal only days after the "stimulus" bill passed so that they don't get the dreaded downgrade of doom from Moodys or S&P.

This is a case-in-point of why Congress needs to read 1000 page bills before they are voted on. You never know when the Head of the Banking Committee might invalidate billions of dollars worth of bail-out money with a single stroke of a pen.