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Faced with the continued unwinding of the global financial system, the Treasury is opening a new front in its battle to right the banking system. By buying stakes directly, the government would immediately bolster banks’ capital foundations. But such a move — as the details of how it will be done are still sketchy — carries its own set of risks.
Treasury Secretary Henry Paulson said Wednesday that the financial bailout bill approved by Congress gives him wide authority to inject capital into the banking system. The White House confirmed Thursday that could include having the government take a direct ownership stake in banks.
The move follows action by the British government Wednesday to spend hundreds of billions of pounds to rescue its banking system.
In just the past few weeks, the contraction of lending has accelerated. Banks are unwilling to lend to each other out of fears that the borrower may be the next institution to fail. As the global lending machinery slows, the economy slows with it. The longer it takes to get money flowing again, the greater the risk of a deep and prolonged recession.
The plan would have little immediate impact on the safety of individual deposits. The Federal Deposit Insurance Corp. recently raised insurance limits individual accounts. But that may not be enough to calm nervous depositors — who may decided to move money to countries with unlimited guarantees on bank deposits.
“Internationally several countries — Germany, Ireland, and so forth — have guaranteed all deposits,” said William Seidman, “We'll have to see if that drains money out of the United States.”
The Treasury’s investment of billions of dollars indirect ownership of banks would constitute a stunning reversal of the government’s policy of minimal intervention in free markets. Much of the opposition to the $700 billion financial bailout came from Republicans who opposed using tax dollars to backstop failing financial institutions
Supporters of the idea, including Sen. Charles Schumer (D-NY), who chairs the Joint Economic Committee, said having the Treasury buy stakes in banks could insure that taxpayers benefit later.
"When the market recovers, the federal government would profit," Schumer said.
The idea is not without risks. If banks turn over stock to the government, it dilutes the value of shares already held by investors. Lowering value of already-battered bank stocks could put greater pressure on lending.
“If they're going to go in with an injection of capital into banks where the taxpayer is going to profit from that, that drives down equity capital in banks,” said David Malpass, a senior Treasury official in the Reagan administration. “It's a giant sucking sound away from bank equity and away from bank equity capital and from lending. Banks won't lend.”
Banks don’t have to sell stock to the government. But under the terms of the recently enacted Troubled Asset Relief Program, any bank that wants to sell bad mortgage-backed debt to the government have to give the government, in return, the right to buy some of its stock. Banks that have loaded up their books with these bad mortgage assets may have no choice.
“The only reason they're putting money in those banks and the banks are accepting is that the banks will go broke without it,” said Bill Seidman, former chairman of the Federal Deposit Insurance Corp. “They're not taking this because they love the government. They're taking it because the regulator is saying, ‘You don't have enough capital. If you don't get more capital, we're going to close you down.’”
Some critics suggest that government regulations may be a big part of the problem banks are now facing. The huge losses they’ve booked are due in large part to the heavy writedowns in the value of investments back by mortgages — for which there are no buyers. Most people are still paying their mortgages, so these investments are almost certainly worth something.
But because of the uncertainty about rising defaults and falling home prices, banks are required to “mark” the value of these investments to the “market price,” which may be far less than they’re really worth. Congress recently gave the Securities and Exchange Commission more leeway to relax those accounting standards.
“The SEC has destroyed $500 billion of bank capital by its senseless marking to market of these assets for which there is no market,” said William Isaac, former FDIC chairman. “And that has destroyed $5 trillion of bank lending. That's a major issue in the credit crunch we're in right now. The banks just don't have the capital to start lending right now because of these horrendous markdowns that the SEC's approach required.”
But allowing banks to assign a higher value to these investments could backfire — by undermining confidence in bank bookkeeping. That’s the main purpose behind the TARP program. The hope is that once the government begins buying these mortgage-backed investments, bankers, investors and depositors will get a better idea of how much capital banks have to work with — and which banks are at risk of going under.
That uncertainty about how much mortgage related assets are worth could also undermine the government efforts to pump money into the system by buying up stakes in banks.
“The problem is if you capitalize the banks that hold these troubled assets — but there’s no clarity or transparency or price discovery process for these assets — then that capital could quickly evaporate,” said David Resler, chief economist at Nomura Securities. “You need to have both.”
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 | Eye on the economy: Rate cut doesn't calm markets | Associated Press | Wed Oct 8 | 43 |
 | Bailout becomes buy-in as feds move into banking | Associated Press | Tue Oct 7 | 8 |
| Paulson endorses bank stock purchase plan | Associated Press | Wed Oct 8 | 0 |
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{"commentId":3403659,"authorDomain":"rlmullen12"}
Huh? I thought the article was about America becoming a Socialist economy because our government sold us down the river. I didn't realize it was another attack Bush article. If everyone writing really beleives this issue is only 8 years in the making your sadly mistaken. Please research and you will find this is 15 - 20 years in the making.
It pains me terribly that when the government purchases the banks that all future profits will go to the government to do what spend on pork barrel projects and the taxpayers who are flipping the bill will get what we always get the shaft.
Please do not vote for anyone with a "D" or "R" behind their name or we will get more of the same and exactly what we deserve. American wake up!!!!
{"commentId":3403659,"threadId":"383954","contentId":"1975980","authorDomain":"rlmullen12"}
- 3 votes
#26 - Thu Oct 9, 2008 4:18 PM EDT
{"commentId":3403776,"authorDomain":"sthomash"}
I have so little confidence in anything coming out of Paulson's mouth or from any of the politicians who have so far said what we need to do. My guess is that Wall Street has the same concern based on the continued fall. There must be some brilliant financial minds out there that could come forward and either support the current plan or offer something else. Maybe it would be better if those in Washington would just keep quiet.
{"commentId":3403776,"threadId":"383954","contentId":"1975980","authorDomain":"sthomash"}
- 2 votes
#28 - Thu Oct 9, 2008 4:23 PM EDT{"commentId":3403810,"authorDomain":"widemoto"}
It sure looks like we really got screwed by Congress and the Administration in getting this bill rushed and passed to bail out the greedy banks. Its no wonder the AIG executives went on a week long vacation at that luxury spa.
The're probably laughing all the way to the "bank." This whole thing makes me want to puke in their faces.
{"commentId":3403810,"threadId":"383954","contentId":"1975980","authorDomain":"widemoto"}
#29 - Thu Oct 9, 2008 4:25 PM EDT{"commentId":3403818,"authorDomain":"amosriddelsjr"}
SHOW ME THE BUTTON!!!
{"commentId":3403818,"threadId":"383954","contentId":"1975980","authorDomain":"amosriddelsjr"}
#30 - Thu Oct 9, 2008 4:25 PM EDT{"commentId":3403850,"authorDomain":"wtram46"}
I, too, wonder why the CEO's that caused this haven't been put in prison. Are they above Enron?? They should pay back a millions they ran off with. I ain't greedy--I'd settle for just 1 million!!! Another Bush Bungle!!!
{"commentId":3403850,"threadId":"383954","contentId":"1975980","authorDomain":"wtram46"}
#31 - Thu Oct 9, 2008 4:27 PM EDT{"commentId":3405984,"authorDomain":"avivid8"}
http://www.youtube.com/watch?v=1RZVw3no2A4 Wall Street made money but did not cause this problem. Watch the video When Congress forces banks to make bad loans Wall Street just followed what Freddie and Fannie what them to do.
{"commentId":3405984,"threadId":"383954","contentId":"1975980","authorDomain":"avivid8"}
{"commentId":3403871,"authorDomain":"bigbconners"}
{"commentId":3403882,"authorDomain":"cj-134"}
It's an election year and the election is soon. Of course the democrats are going to blame the republicans for all our problems and the other way around.
Personally I say we need more term limits so the system cleans itself of all the political trash we've accumulated over the years.
{"commentId":3403882,"threadId":"383954","contentId":"1975980","authorDomain":"cj-134"}
- 1 vote
#33 - Thu Oct 9, 2008 4:28 PM EDT{"commentId":3404000,"authorDomain":"bigbconners"}
{"commentId":3403914,"authorDomain":"jls427sohc"}
The headline should read Paulsons carrier at risk.
{"commentId":3403914,"threadId":"383954","contentId":"1975980","authorDomain":"jls427sohc"}
#34 - Thu Oct 9, 2008 4:29 PM EDT{"commentId":3403957,"authorDomain":"baja-bandito"}
{"commentId":3403936,"authorDomain":"baja-bandito"}
{"commentId":3404091,"authorDomain":"widemoto"}
Paulson is digging a hole so deep that he will reach China soon. Maybe he can ask the Chinese government for a bailout when he gets there.
{"commentId":3404091,"threadId":"383954","contentId":"1975980","authorDomain":"widemoto"}
#36 - Thu Oct 9, 2008 4:37 PM EDT{"commentId":3404100,"authorDomain":"ghmountaineer"}
bepaient, your right on term limits, but it would take an amendment to the constitution and that's not going to happen with our current administration. They all know that the longer they stay the more they pad their own pockets.
My congressman voted against the bail out package -- good for him.
USMCWarmonger - my financial adviser told me the same thing, says a new administration no matter who wins - the market goes up. This may be true, but I think if BO gets elected this bloodletting will continue.
{"commentId":3404100,"threadId":"383954","contentId":"1975980","authorDomain":"ghmountaineer"}
#37 - Thu Oct 9, 2008 4:38 PM EDT{"commentId":3404218,"authorDomain":"baja-bandito"}
{"commentId":3404106,"authorDomain":"baja-bandito"}
{"commentId":3404161,"authorDomain":"amosriddelsjr"}
oohrah...that maybe the answer...get rid of all those nukes rusting away on the shelves...high paying american jobs building new ones...i'm sure we would get better gas milage from irradiated oil
{"commentId":3404161,"threadId":"383954","contentId":"1975980","authorDomain":"amosriddelsjr"}
#39 - Thu Oct 9, 2008 4:41 PM EDT{"commentId":3404879,"authorDomain":"adirondack-1"}
Since I have been watching C-SPAN and Pelosi has been in control of the floor I hate to say it but this was their plan all along to discredit this administration. The problem is they have pals around the world who also wanted to hurt either this country or the GWB admin. What started out as a political hack snowballed out of control to the point even OPEC is looking to capitolize on world fears, like they never thought of that before.
The point is that those who have cash on hand and are not holding ridiculously overvalued investments will do OK. Whats really interesting is that for years now I have been getting calls from, lets say non english first language people, working for BANKS in outsorced capacities where they are neither licenced or prosecutable for their acts. The lenders knew they could whip them hard enough to get them to become unethical and then go illegal simply because their competition risked punishment and they could easily out perform them. Outsourcing financial business should be illegal period. I have griped to this effect for years and now we will wait for the trials to start only to find those at the top prosecuted when it should be every last pig that ate at the trough.
{"commentId":3404879,"threadId":"383954","contentId":"1975980","authorDomain":"adirondack-1"}
#40 - Thu Oct 9, 2008 5:17 PM EDT{"commentId":3404991,"authorDomain":"csakony"}
The funniest part was "if you take a stake in ownership you hurt the bank and they simply will not lend money". Nothing like obviously pointing out that they will hold us hostage until we allow them to drink from the welfare cup freely. Simple answer "YOU DON'T HAVE A CHOICE!!!!!!!!!!!!!!!!!!!!!!" It's our way or the highway - nobody is lining up to help you failures!!! You are welcome to take any one of your other choices on the table lets see there's.... oh I know bankruptcy!!!!! Morons. A typical Republican theory of hostage taking.
{"commentId":3404991,"threadId":"383954","contentId":"1975980","authorDomain":"csakony"}
#41 - Thu Oct 9, 2008 5:22 PM EDT{"commentId":3405050,"authorDomain":"csakony"}
What is even less suprising is that this moron was part of the Reagan admin - Gee big surprise. He was the failure that started everything with his deregulation happiness!!! Of course now he would probably say uhhh I don't recall. Funny never saw a man who couldn't recal any of his failures. Poor dumb b*s*a*rd claimed he couldn't remember so often he finally couldn't = CRIMINAL!!!!!
{"commentId":3405050,"threadId":"383954","contentId":"1975980","authorDomain":"csakony"}
#42 - Thu Oct 9, 2008 5:24 PM EDT{"commentId":3405277,"authorDomain":"alanjsteinberg"}
So the plan is risky, it is only our money and our future. I am sure they all have their money somewhere safe. When will Americans wake up and smell the coffee "all politicians are criminals and we should not vote for any of them". If there was an honest politician he would not last a week. We need to get GWB out of office and not just put any idiot in. None of the cantidates running are even close to being able to run this country. They are offering us a decrepid old man who will never survive the stress of lying and stealing from the people for four years, and two tokens of different sorts to try to pull the wool over the American peoples eyes by playing the race and sex cards. We need more choices!!!!!!!
{"commentId":3405277,"threadId":"383954","contentId":"1975980","authorDomain":"alanjsteinberg"}
#43 - Thu Oct 9, 2008 5:36 PM EDT{"commentId":3405628,"authorDomain":"adirondack-1"}
GWB was a lame duck the minute he was sworn in so there is no worry of anything there. Second, this is world wide and greed has no boundaries much less political party. If you look at the backgrounds of the two candidates you'll find the old fogey to be a safe bet where as the man from illinois is representative of Illinois politics, corrupt and a total failure. If BO was half the leader he claims he would have fixed Chicago at least. Apparently he couldn't get the muscle and money required without going up a notch to get financed and the DNC was the money pit ripe with hope spending. Even if John passes in office Palin will not have any power as every president only gets a short honeymoon before business begins. Getting elected in a non business environment on a tax the business strategy put BO in a hole and as bad a position to do anything but take us down the isolationist road right when the world needs our strength and solidarity.
{"commentId":3405628,"threadId":"383954","contentId":"1975980","authorDomain":"adirondack-1"}
{"commentId":3405434,"authorDomain":"awalsh8174"}
Ha! For years the Fed/Treasury pumped increasingly worthless paper money into the banks, which pumped them into the economy. Now, the treasury is going to use more near-worthless dollars to purchase near-worthless bank stocks. We have come full-circle with this insanity.
{"commentId":3405434,"threadId":"383954","contentId":"1975980","authorDomain":"awalsh8174"}
#44 - Thu Oct 9, 2008 5:46 PM EDT{"commentId":3405461,"authorDomain":"hodg1687"}
If everyone panics then we will most certainly go into a depression. Maybe we should all go shopping as Bush wanted when they were handing out the tax stimulus checks. Just buy American products like Budweiser! Excuse me maybe Coors?
{"commentId":3405461,"threadId":"383954","contentId":"1975980","authorDomain":"hodg1687"}
#45 - Thu Oct 9, 2008 5:47 PM EDT{"commentId":3405557,"authorDomain":"dwyearous"}
Okay, I'm not a person who usually does this, but I think one problem we have is that we have people in the senate and house and of course the idiot in office that cant manage their own checkbook let alone ours. We need to get the senators and others out of the decision making progress as far as the economy goes and get people together, worldwide, to brainstorm our way out of the mess that these so called leaders of the financial system have gotten us into
{"commentId":3405557,"threadId":"383954","contentId":"1975980","authorDomain":"dwyearous"}
#46 - Thu Oct 9, 2008 5:51 PM EDT{"commentId":3405568,"authorDomain":"chickwithagun69"}
So the big bailout isnt working? Gee...what a surprise. Didn't see that coming at all......(rolls eyes).
The only way to boost the economy is if people are working. The government is saying that once they free up the banks to be able to lend again, then the economy will go back up and be stable. Really? For whom? I don't know where they (politicians) come from, but where I live, you gotta have a JOB to be able to borrow money. So basically, this is to allow banks to lend to big coorporations so they can expand their businesses (by outsourcing jobs to India and so on, for cheaper labor). Maybe it will "trickle down" to us little people. Dont hold your breath.
Now the government wants stock options and control of the banks. Oh that makes me feel so much better...having the government control my money.
{"commentId":3405568,"threadId":"383954","contentId":"1975980","authorDomain":"chickwithagun69"}
- 1 vote
#47 - Thu Oct 9, 2008 5:52 PM EDT{"commentId":3406006,"authorDomain":"dhand34"}
remember Econ 101, No it was never going to work. AND it was not supposed to
{"commentId":3406006,"threadId":"383954","contentId":"1975980","authorDomain":"dhand34"}
{"commentId":3406023,"authorDomain":"dhand34"}
remember Econ 101, No it was never going to work. AND it was not supposed to
{"commentId":3406023,"threadId":"383954","contentId":"1975980","authorDomain":"dhand34"}
{"commentId":3405731,"authorDomain":"adirondack-1"}
I would have liked to see a billion put into forrest management to thin out these "protected areas" and have the lumber used to build homes and heating products. But Noooo smokey the bear likes wildfires instead of natural burns cause it keeps firemen busy and the sale of used planes to fight them goes up not to mention the greenies happy at the voting booth.
{"commentId":3405731,"threadId":"383954","contentId":"1975980","authorDomain":"adirondack-1"}
#48 - Thu Oct 9, 2008 5:59 PM EDT{"commentId":3405828,"authorDomain":"audie"}
There you go again... blaming Bush, et al. The blame falls squarely on the American people. This problem is 30+ years in the making spanning both anointed parties. Americans elect and reelect incompetent and corrupt representatives. Americans over consume and finance it with debt. Americans ceded a manufacturing economy for a shell game services one and now we cannot produce the goods needed to sell the world and trade our way out of this mess (the only way out). Americans created a real estate Ponzi scheme. Americans endorsed dumbing down. The vast majority of Americans supported an insane invasion of a hapless country (anyone read "The Three Trillion Dollar War"?) after a handful of Arabs with box cutters hijacked a few airplanes. There's no better example of irrationality in America. Yes it was a horrible incident but 1,500 die _every day_from cancer. About 42,000 die annually in car accidents. About a half-million die annually from cigarettes. The surgeon general claims obesity is the gravest danger facing Americans. Is there a difference between an automobile crash caused by some drunk or cell-phone yakker and a plane ramming the World Trade Center -- doubtful the dead would think so. Of course, having failed to prevent 9/11 (when there was plenty of indications and vast bureaucracy created to do just that) the government does what it normally does: diverts attention from its failure, creates a war and more bureaucracy and debt (and adds death to the mix), and invents an insurance policy for appearances and guilt to pay off the victim's families as if we have an infinite amount of money. Americans now blame lack of regulation for preventing the Wall Street melt-down but creates TSA, when lack of further hijackings is widely attributed mainly to locked cockpits now. Does anyone realize or care how much that 50,000 strong farce costs?? The well is dry, America. We do not have a new drill, and virtually everyone in one way or another dipped. And next month Americans will elect another political pygmy and in 4 years will be wondering why the downward spiral continues and having these same silly my-candidate-is-better-than-yours discussions, providing we still can afford electricity for our PCs.
{"commentId":3405828,"threadId":"383954","contentId":"1975980","authorDomain":"audie"}
- 1 vote
#49 - Thu Oct 9, 2008 6:05 PM EDT{"commentId":3405862,"authorDomain":"jbdaad"}
{"commentId":3405980,"authorDomain":"dhand34"}
Why is Paulson not in jail? Oh I forgot we have a criminal government
{"commentId":3405980,"threadId":"383954","contentId":"1975980","authorDomain":"dhand34"}
#51 - Thu Oct 9, 2008 6:14 PM EDT{"commentId":3406156,"authorDomain":"avivid8"}
The Dow will soon be where it was after 9/11. I hope it rebounds faster, that took 6 years, but if not we can wait this out. Have faith
{"commentId":3406156,"threadId":"383954","contentId":"1975980","authorDomain":"avivid8"}
#52 - Thu Oct 9, 2008 6:24 PM EDT{"commentId":3406619,"authorDomain":"jgpeterson16"}
401k's and IRA's can be risky whereever they are kept. The risk is in what they are invested in - stocks, mutual funds, money market, or just plain cash. Money market and cash in the bank or at the broker are safe (insured). Stocks and especially mutual funds are risky. Even the best stocks can follow the market up or down. Most mutual funds are riskier than stocks. DO NOT take anyone's word for what is a good stock or mutual fund without checking it out yourself. And to check out a mutual fund you have to check out the expenses to you (fees/maintenance), management of the fund, the dozens of investments (stocks/bonds/whatever) it is in to. As most funds will tell you, history is no predictor or guarantee of future performance. If you are not capable of evaluating an individual stock, you are not capable of evaluating a fund. And I definitely would not trust the ratings people, they couldn't even evaluate a package of subprime loans (part of our current problem). And brokers? They have a whole long list of people/groups they must be loyal to before they are loyal to even their best multi-millionaire cxustomers. (Co-workers, branch manager, other divisions of the brokerage house, the brokerage house, companies being underwritten by that brokerage house, companies for whom they serve as market-maker, associated companies (banks, insurance, etc), best billionaire customers, spouse, children, parents, siblings, other relatives (cousins, in-laws, etc), friends, anyone to whom they may be indebted for any reason. This is the normal broker's list of people/groups to whom he assigns a higher priority than he does to you and your meager thousands. Yes, it would make sense if he gave you great advice and you ended up as a billionaire. His commission would be sky high. But, if he could do that, it would be with his own money. That way, when he didn't push the stock or fund to be sold that week, he wouldn't be downgraded to assistant janitor.
{"commentId":3406619,"threadId":"383954","contentId":"1975980","authorDomain":"jgpeterson16"}
#53 - Thu Oct 9, 2008 6:51 PM EDT{"commentId":3406788,"authorDomain":"take2la"}
You mean the risk they'll be whining/asking again in 2 days
{"commentId":3406788,"threadId":"383954","contentId":"1975980","authorDomain":"take2la"}
#54 - Thu Oct 9, 2008 7:02 PM EDT{"canLink":false,"threadId":"383954","isPrivate":false}
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