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"The Devil is in the details" - German proverb

As advisers, all of us may have varying opinions about the short-term and longer-term effectiveness of the Federal government's very active recent intervention efforts to assist credit markets, bank liquidity and general financial system consumer confidence. Nonetheless, there shouldn't be any disputes about the importance of advisors understanding all of these programs' key facts versus the headlines' impressions on how these programs work to deliver accurate, advantageous advice to your clients. The headlines and the three to six bullet point summaries in the CNBC bottom banner or in news web site headline summaries are definitely not complete enough to draw fully accurate conclusions. More importantly, the headlines on their own can be very misleading.

This week's announcement of the infusion of up to $250 billion of new capital into U.S. controlled banks by the government joins a myriad of other Treasury, FDIC and Federal Reserve announcements of new programs coming out almost weekly since mid-September. The very first news headlines I saw on the newest upcoming infusion of bank capital was a news alert in my email that roughly read something like "U.S. to partly nationalize nine largest banks." Well, I think it is fair to say a program that is ostensibly voluntary (banks can decide by November 14th to participate or not) and involves the issuance of senior non-voting preferred stock at levels that can't exceed $25 billion or 3% of any given issuing institution's risk-adjusted assets, isn't really the same as an even partial "nationalization." Also, the issuing bank can buy back the preferred stock after three years - the government's money doesn't have to be part of even their long run capital structure, although the government does get some warrants to buy some common stock, but is far from a controlling interest.

The specific new Treasury department actions that prompted this email related to some very misleading media headlines that were used, as the government desired, to calm investors on September 19, 2008 and to stave off a redemption run that started that week on non-government securities money market funds. With several major brokerage firms teetering, and the Reserve Fund "breaking the buck," suddenly that little footnote on your brokerage statements next to your money market balance that said "not FDIC insured," seemed to mean a lot more. The Treasury department said to themselves, something like, "We have to fix that, or no one will be able to roll over their commercial paper, regardless of their credit quality." A reasonable concern.

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