Straight Talk About Cash Injections for Banks
The article below is straight talk on cash injections. Never believe that these are cash injections into banks are the benevolent actions from investors. The investor will obtain their pound of flesh at some point in the future. In keeping with the movie theme it is more like “The Godfather” and less like the “Miracle on 34th Street” or “The Christmas Carol”. Text in bold is my emphasis. From Market Watch:
Citigroup Inc., Bear Stearns Cos. and E-Trade Financial Corp. seem to be borrowing lines from movies.
Like Kevin Bacon in "Animal House," they are shouting "all is well." Like the "Wizard of Oz," they are prodding investors to "pay no attention" to the cash injections "behind the curtain."
Unfortunately, anyone looking honestly at the situation must feel like police Chief Martin Brody in "Jaws" when he uttered, "you're going to need a bigger" bailout.
Now, UBS AG seems to be doing its own brand of acting. The Swiss banking giant on Monday announced it would write down $10 billion and take a capital injection of $11.5 billion from Singapore and an undisclosed investor from the Middle East.
The losses "could have been absorbed by our earnings and capital base," UBS Chairman Marcel Ospel said in a statement.
With the cash infusion, UBS will be able to increase its Tier 1 capital, low-risk assets that are the core measure of a bank's strength when viewed by regulators. The $7.5 billion investment by Abu Dhabi into Citigroup helped raise that bank's Tier 1 level close to its target of 7.5% of all assets.
Ultimately, the cash infusions -- which cost some banks higher-than-market interest -- are aimed at shoring up the reserves. No bank wants a regulator of ratings agency to cause a Northern Rock-style run on the bank.
So don't believe them when they tell you it's "merely a flesh wound."