Deploying Paulson’s Capital: The strong and weak of it.

The BB&T (BBT) conference call this morning gave more insight into the TARP Capital Purchase Program than any public comments from Treasury Secretary Paulson and Federal Reserve Chairman Bernanke. BB&T stated repeatedly: Paulson said the program is to buy senior preferred stock in stronger financial institutions so that they could deploy the capital to new loans. But, the first $125B round included Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS) – all banks which BB&T considers weaker. JP Morgan (JPM) said during yesterday’s conference call that the program would benefit its competitors far more than itself, but for the sake of the country they would sacrifice. JP Morgan conceded that the price was right.

BB&T said that they would consider using the program as an inexpensive source of capital to support acquisitions. BB&T made it clear that there were not enough credit worthy customers to support the lending power it already has. JP Morgan said that they would deploy the capital profitably for shareholders, but it was too early to say exactly how. FDIC Chairwoman Sheila Bair eluded that Wachovia (WB) might have survived independently if the program had started earlier. I have not heard any banks or other government officials support Paulson and Bernanke’s claims that the program will flow money through to businesses and consumers loans.

Maybe we should rename the program “Paulson’s Save the Banks to Big to Fail Program”. Citigroup, Goldman Sachs and Morgan Stanley are too big to fail; and Bank of America (BAC), Bank of New York Mellon (BK), JP Morgan and State Street (STT) were brought along to remove the stigma. Merrill Lynch (MER) and Wachovia (WB) were indirectly included by their mergers. Even the strong amongst this group encountered bear raids, so this cushion can’t hurt.

By this time everyone knows the basics: 5% dividend for 5 years then 9%, perpetual term, callable in 3 years, cumulative for holding company banks and non-cumulative for non-holding company banks. The Treasury directs that the participating institutions must maintain the increased capital level by restricting early redemptions to replacement by a “Qualified Equity Offering”. While the Treasury is forcing more capital on the books, it has showed little enforcement power over its use. The guidance to deploy is only for the public’s consumption.

With all the detail in the “Summary of Senior Preferred Terms”, BB&T is still unsure of the Treasury criteria for distributing the next $125B round of the program. Amongst regional and community banks, will only the strong be funded? Will the Bush Administration revert back to Darwinism or try to save as many banks as possible? Certainly Paulson could provide us with some clarity.

Disclosure: Author is long BAC, C and WB.

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