Financial Roundup: Paulson Backs Mitsubishi, Bailout Takes Shape

U.S. Treasury Secretary Hank Paulson couldn’t stomach the possibility of Japan’s Mitsubishi UFJ Financial Group walking away from its announced investment in wobbly Morgan Stanley. So Paulson made Mitsubishi an offer it couldn’t refuse: The U.S. will back your play.

Despite the mass infusion of taxpayer-backed funds into the U.S. banking system, the Bush Administration is still counting on private investors, such as Mitsubishi, to help shore up and recapitalize the nation’s banking concerns.

But private investors aren’t sure where they fit into this rescue scenario, especially since the federal bailout’s emphasis has shifted to the government making direct investments into failing banks instead of buying the industry’s toxic home mortgage securities.

Mitsubishi, for example, was very concerned that its estimated $9 billon investment in Morgan would be wiped out if the government were to eventually recapitalize Morgan. It didn’t want to suffer the same fate of private investors in Freddie Mac and Fannie Mae, who lost everything when the U.S. took over those agencies.

Recently, Morgan scraped its old investment banking model to become a more traditional bank holding company.

To raise the Japan bank’s comfort level, Treasury assured Mitsubishi its Morgan stake would be protected even if the U.S. did inject money into Morgan. That promise is expected to go beyond this deal; it’s viewed as a strong signal to other bargain-hunting private investors that the U.S. will limit their downside risk when they plow capital into the banking system.

Whether Treasury’s agreement to protect Mitsubishi will carry a lot of weight with other private investors remains to be seen. Right now the big private money, much of which is in sovereign wealth funds, is on the sidelines waiting to see what unfolds.

Let The Bailing Begin. Let’s not forget the original plan behind the estimated $700 billion economic recovery: Clean up the bank industry’s balance sheet by having the U.S. acquire distressed mortgage-backed securities.
The plan is suppose to free up bank books thereby enabling lenders to start providing credit again.

Now, the man in charge of buying and selling those sick mortgage securities from banks is revealing some of his battle plan. Speaking before the Institute of International Bankers in Washington D.C., Neel Kashkari, interim assistant secretary for financial stability, outlined his approach.

So far, no huge surprises. And no real details.

The government will purchase and then try to sell toxic securities from national and regional banks, while also devising ways to keep delinquent home mortgage borrowers in their home, he said.

Take The Day Off. Banks are closed for the Columbus Day holiday, which might provide a much-needed “time out” for the battered industry. It sure can’t hurt.