Paulson's $250 Billion Bank Deposit

Wall Street economists and analysts talk about the historic government cash infusions into troubled banks

From Standard & Poor's Equity Research

The first salvo in the U.S. government's battle to repair the nation's battered banking system featured a staggering amount of financial firepower. On Oct. 14, Treasury Secretary Henry Paulson announced plans for the government to take stakes in large financial institutions as part of a $250 billion effort to inject cash into financial institutions. Also, the Federal Deposit Insurance Corp. will temporarily guarantee most new debt issued by insured banks.

Wall Street economists and analysts had plenty to say about the historic plan and its potential implications on Oct. 14. Here is a sampling of their insights assembled by BusinessWeek and S&P MarketScope staff:

Stuart Plesser and Matt Albrecht, S&P Equity Research

At first view, we think the government's plan will help the less-capitalized names in the group such as Citigroup (C), Bank of America (BAC), and Morgan Stanley (MS) at the expense of better capitalized companies such as JPMorgan Chase (JPM), Wells Fargo (WFC), and US Bancorp (USB) . The reason for this is that with the government's assistance, undercapitalized companies will now be on equal terms with their better-capitalized brethren.

Of course, this won't make up for the attractive deals that JPMorgan Chase (purchasing Bear Stearns and Washington Mutual) and Wells Fargo (purchase of Wachovia (WB) pending) were able to procure due to their strong capital base. But market share gains and concomitant loan growth for JPMorgan Chase and Wells Fargo will likely not be as strong as it otherwise would have been.

John Ryding and Conrad DeQuadros, RDQ Economics

Someone wise once told us "Never let the perfect be the enemy of the good." While we never wanted to get here, the reworking of the TARP to cover capital injections and loan guarantees, as well as the actions by the Fed with the CPFF and the uncapping of the currency swaps and by Britain and Euro-15 governments, should be sufficient to provide the wider firebreak, and we think that the risk of a financial meltdown has peaked. It is our judgment that last Friday marked the lows in the equity market, although the market still has to contend with the uncertainties of the recession. We would expect the London interbank offered rate to fall somewhat given the loan guarantees, additional capital, and extra liquidity (an institution getting the loan guarantees essentially pays the FDIC a 75-basis-point spread to guarantee unsecured funding, which given a fed funds target rate of 1.5%, might put three-month LIBOR in the 2.5% area once these programs are fully in place).