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October 14, 2008

US Buys Stock In Banks

The bailout money is starting to flow from the Treasury and all I can say is, congratulations fellow shareholders!

The president said the decision to to buy shares in the nation's leading banks — a kind of federal intervention not seen since the Depression era — was "not intended to take over the free market but to preserve it."

Said Treasury Secretary Henry Paulson: "We regret having to take these actions. Today's actions are not what we ever wanted to do — but today's actions are what we must do to restore confidence to our financial system."

…Under the new multifaceted stabilization program described Tuesday, the government will initially buy stocks in nine major U.S. banks. When financial markets stabilize and recover, the banks are expected to buy the stock back from the government, Bush said in brief remarks from the White House Rose Garden.

… The administration plans to spend $250 billion this year on the stock purchases and the president certified Tuesday that another $100 billion would be needed in connection with covering bad assets. That would leave $350 billion of the $700 billion program, presumably to be spent by the next president.

The move follows similar actions in the UK.

I’m not going to pretend to know if this is going to work. It’s definitely a drastic step and one can only hope it works out in the end.

MORE: Were banks reluctant to participate and will they use the money the way the government wants?


The Washington Post has a wrap and apparently banks were not thrilled with the plan and it's far from certain how the money will be used.

In pressing the bank executives to accept partial government ownership, Paulson's message was clear: Though officially the program was voluntary, the banks had little choice in the matter. In exchange for giving the Treasury minority stakes, the nine firms would jointly receive an investment worth $125 billion. The government would make another $125 billion available for the next 30 days to thousands of other banks and thrifts across the country.

...There is a risk that banks will take the new government capital and use it to bolster their balance sheets but still not resume lending, and the Treasury is not getting any specific contractual guarantee to prevent that from happening. But bank regulators, particularly the Federal Reserve, will lean heavily on the firms receiving infusions to use the capital to increase their lending to businesses and consumers.

Letting the financial system seize up and collapse in the name of ideological purity is simply not an option. There is however no guarantee Paulson and the folks at Treasury will have any better luck in undoing this mess than the market did.

We clearly aren't even remotely out of the woods yet.

digg this
posted by DrewM. at 02:31 PM

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