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October 16th, 2008

Should Certain Banks Not Get the Cash Infusion?

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Earlier this week, nine banks were given an offer they couldn’t refuse. Citigroup, Goldman Sachs, Wells Fargo, JP Morgan Chase, Bank of America, Merrill Lynch, Morgan Stanley, State Street, and Bank of New York Mellon have all agreed to participate in the $250 billion TARP program, an initiative that will allow the government to purchase preferred shares of the banks’ stock in return for a capital infusion resulting from the purchase price.

This agreement is currently upsetting numerous smaller more localized banks. “The government has explicitly backed their competition,” said HSH Vice President Keith Gumbinger. According to the Washington Post, smaller banks resent being lumped in with the large, problem-ridden banks:

Community banking executives around the country responded with anger yesterday to the Bush administration’s strategy of investing $250 billion in financial firms, saying they don’t need the money, resent the intrusion and feel it’s unfair to rescue companies from their own mistakes.

As an example, at the top of the “group of nine” list is Citigroup, a firm which just posted its fourth-straight quarterly loss, and has recorded more than $13 billion of loan losses and writedowns. Speaking to the state of the company, Citi has laid off 11,000 workers since June.

By comparison, State Street Bank, a smaller regional bank, reported a 33% increase in profits in the third quarter of ‘08, plus a boost in their revenue to $2.8 billion.

So, why were two firms on the opposite ends of the financial perspective receiving the same governmental treatment?:

She (banking analyst Nancy Bush) believes it (State Street) and rival Bank of New York Mellon were included in the first round of government investment to demonstrate that even healthy companies would benefit from the plan and also because of their roles handling assets for others.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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