Paulson Buys Banks: Some Details

As investors chewed over Treasury’s plans to invest $250 billion in U.S. banks, the details released this morning offer a few insights into the agency’s intentions. Among them:

The government isn’t the only one that should act fast. The program gives banks just a month to apply for the aid — until 5 p.m. on Nov. 14, to be precise.

Treasury doesn’t want to stick around: After five years, the government’s 5% dividend payment jumps to 9% — sure incentive for companies to buy them out before then. The government can sell half its warrants and all of its preferred shares more or less any time; it can sell the rest of its warrants after Dec. 31, 2009, and possibly sooner. Companies can buy back the Treasury’s stake, though during the first three years only with cash raised through the sale of common or preferred shares.

“There are several things designed to create a government exit strategy, and that’s important,” says Steve Auth, chief investment officer of equities for Federated Investors. Otherwise, “long-term, you’d have a socialized banking system — obviously that would be a complete disaster.”

Be sure to pay Uncle Sam: If Treasury doesn’t get its dividends, no one else does either; dividend increases for common shares, and all share repurchases, generally require Treasury’s permission in the first three years. If the company doesn’t pay dividends during any six quarters, then Treasury (or whoever holds its preferred shares) has the right to elect two directors to the board.

Before it's here, it's on the Bloomberg Terminal.