Paulson's New Plan: The Good Guys Get Gored (JPM)(MS)(GS)(C)

One size fits all. That is the reasoning behind Treasury’s plan to invest money in a number of large banks by purchasing preferred shares.

Jamie Dimon of JP Morgan (JPM) and Lloyd Blankfein of Goldman Sachs (GS) have to feel that they have been sacrificed on Henry Paulson’s bank bailout altar. Healthy financial companies are being told that they must take on the burden of new debt, whether they want it or not. Whether they need it or not.

The new program will put $250 billion in cash directly into banks and Treasury will get an equity piece. The agency is using preferred shares so that current holders of common stock are not diluted.

The plan has one very deep flaw. JP Morgan has to take on $25 billion which is the same amount as its much weaker rival Citigroup (C). The market certainly views the risk presented by the two companies differently. Since the beginning of the year JPM shares are flat. Citi is off more than 45%.

A look at Goldman Sachs and Morgan Stanley (MS) is also a study in contrast. Goldman is down less than 50% since January 1. Even with a huge rally in its shares yesterday, Morgan has fallen nearly 70% during the same period. Paulson is force feeding $10 billion into each institution, although one is almost certainly healthier than the other.

Treasury would make the argument that time is short. It may only have a few days to restore confidence in the banking system. Cutting the healthy cattle out from the herd would take too much time.

But, that reasoning is feeble-minded. Money raised by JPM has put its capital position, based on its Tier 1 ratio, at over 8%. The market expects more write-offs at Citigroup than it expects at JP Morgan.

Banks do have relatively standard measurements of health. While these may not be perfect, they are almost always directionally correct.

Paulson has done the best banks and brokerage firms a disservice. He has also undermined his own program. While $700 billion is a lot of money, there is still not enough to go around given how deeply wounded the banking system is. He could have saved the money he is putting into the healthy and used it for the sick.

Douglas A. McIntyre