Treasury plan to buy bank stakes carries risks

Thu Oct 9, 2008 1:27 PM EDT

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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{"commentId":3407044,"authorDomain":"r2bot"}

A Wetmore

Just elect Obama and install the Marxist / socialist government that the liberals want and when gas is $10.00 a gallon and bread is $8.00 a loaf and wadges are doled out by a government bureaucrat then it'll be OK. How many times does someone have to bankrupt a program before you stop voting for them. If that's how I did my job I'd get fired, I don't get it.

{"commentId":3407044,"threadId":"383954","contentId":"1975980","authorDomain":"r2bot"}

#51 - Thu Oct 9, 2008 7:18 PM EDT

{"commentId":3407293,"authorDomain":"gozounlimited"}

GOZO-unlimited

The banks that are in trouble are 'Investment Banks' not commercial banks. The reason they are in trouble is that our dear terrorist in chief allowed these institutions to function in the dark with no oversight or regulation.....so......they leveraged their assets 65 to 1 and financed billions in credit default swaps......well guess what? Those who purchased the derivatives.....betting that the market would fall...(DAH) and even those who didn't but said they did (no accounting) want their money now!!!!! That is why the banks don't trust each other and they never will until we regulate and allow the scammers to fail. So instead of bank money, YOUR 401k is getting sucked up.....and NO ONE is willing to tell the truth and stop this scam.

{"commentId":3407293,"threadId":"383954","contentId":"1975980","authorDomain":"gozounlimited"}

#52 - Thu Oct 9, 2008 7:34 PM EDT

{"commentId":3407342,"authorDomain":"gozounlimited"}

GOZO-unlimited

Stop blameing the American people....they got set up big time!!!!!! We are sick of those of you who have taken advantage of average Americans and are now blaming the victim....You make me sick......

{"commentId":3407342,"threadId":"383954","contentId":"1975980","authorDomain":"gozounlimited"}

#53 - Thu Oct 9, 2008 7:37 PM EDT

{"commentId":3407446,"authorDomain":"mail-27"}

cliffyworld

Please read the article titled "It's Not Always The Pork. The Cows All Have To Be Fed Too" at

{"commentId":3407446,"threadId":"383954","contentId":"1975980","authorDomain":"mail-27"}

#54 - Thu Oct 9, 2008 7:51 PM EDT

{"commentId":3408624,"authorDomain":"dgparr"}

Bad Buoy

OMG, my worst fears are coming true!!!
It's not that this conservative administration has increased the size of the Federal government more than any other in history, nor naturally wants to evesdrop on our heretofore private conversations, nor from a balanced budget they've taken us to our massive and historic deficits.
No, it's this rescue [bailout] plan. I questioned their phrase concerning the Fed accepting any asset from these institutions. Though I can see them putting this to Congress as needing more flexibility than solely the purchase of bad mortgage paper, I feared them being allowed to buy stocks with our money and thus have some government control of the market.
And now it's true. The Fed will be accepting banks' preferred stock for direct infusions of cash. Okay, so as the stock goes down we, the taxpayers will be losing the money [though odds are that prices will eventually rise, it'll be awhile and they still have a ways to fall after the imminent, building rally. But what is the Fed going to do with these shares if they don't use them to maneuver the market?
I'll bet they end up in the Social Security Fund [so some of our government retirement will still be put into the market without public comment]. This has been this administration's technique throughout it's reign. If you can't get what you want through the front door, then do it through the back via Presidential signings, or emergency legislation such as this, the call to war and the PATRIOT act.
Though Bush's election filled me with dread, I had no idea one person could turn this into a Socialist nation.
And as far as fear tactics, whatever happened to the ideal behind Patrick Henry's words:
"Give me Liberty or give me Death!"

{"commentId":3408624,"threadId":"383954","contentId":"1975980","authorDomain":"dgparr"}

1 vote

#55 - Thu Oct 9, 2008 10:03 PM EDT

{"commentId":3409632,"authorDomain":"citizengomezusa1"}

Daretobeyourself

In the fraudulent bailout swindle, the Fed's now wanting to add more to the 700/800 billion (with hyperinflation more like 7 trillion) debt anchor around the American Taxpayer's necks., It is self evident form the desperation of the European Union, G-14 that the International Collapse of the parasitic bankrupt British-Anglo-Dutch monetary System pathogen is not isolated to the United States. Any honest review of the speculative Cayman Island hedgefunds debt accumulated by the speculating bankers reviels that bankruptcy of the derivitive speculators was primarily the origin of the present bankrupt system and the U.S. mortgage crisis was a manufactured smoke and mirror coverup of the already bankrupt system. All this mess needs to be immedediatly put into bankruptcy re-organization to protect the Sovereign U.S. Nation and it's People.

Now, you know why they don't want bankruptcy re-organization mentioned. This is an assault on the Sovereign U.S. Nation. Now you may have a better understanding why they wanted to privatize social security and have Wall street manage it for you, because they wanted to steal everything there too and leave the American People with that loss and debt. Now, they've driven away from the scene of the crime of the un-constitutional fraud bailout swindle representing a 'fascist coup' against the Constitution. The Collapse of the British-Angle-Dutch International Monetary Financial System was forecasted well in advance (source: Executive Intelligence Review News Service). The failure of the U.S. Government to respond to the warning 'Notices' of this financial collapse is evidence that the American Peoples' financial accounts were targeted while the U.S. Government simply again acquised to the coordination of a sophisticated hijacking targeting the American People with this genocidal bailout! Grand Larcency-fraud-extortion-deception by the current U.S. Administration in an 'Open Conspiracy' with 'Foreign Interests' and their U.S. financial institutions. Keypoin t the Bailout swindle authorizes Pauslon the leeway to declare almost anything a financial institution, and includes the domestic arms of British and other foreign banks (e.g., the U.S. banks owned by HSBS and the Royal Bank of Scotland). You can put your trust in Paulson that these foreign banks will be given the highest priority as they are who he is an agent for! So they first steal your money and then they put you on the hook for paying them back for their Cayman Island Hedge-funds and derivative speculation losses they have racked up. It was by grand larceny-fraud-deception-extortion they designed and implemented the U.S. mortgage crisis as a tool of smoke and mirrors manipulation, and now they want to heap more of the toxic waste onto the American Taxpayers, while the present U.S. government facilitates the looting for the International Financial Synarchist, a.k.a. Nazi International.

The International financial system isn't controlled by the U.S. as is quite apparent

{"commentId":3409632,"threadId":"383954","contentId":"1975980","authorDomain":"citizengomezusa1"}

#56 - Thu Oct 9, 2008 11:12 PM EDT

{"commentId":3414581,"authorDomain":"sneila"}

sneilarreal

Even if the market is up 500 points today...won't make a difference.
Trust yourself and your own heart. I do not listen to the so-called fiancial-economic experts because they have proved themselves wrong so, so many times.

{"commentId":3414581,"threadId":"383954","contentId":"1975980","authorDomain":"sneila"}

1 vote

#57 - Fri Oct 10, 2008 10:19 AM EDT

{"commentId":3414615,"authorDomain":"sneila"}

sneilarreal

Even if the market is up 500 points today...won't make a difference, in my opinion.
Trust yourself and your own heart. I do not listen to the so called financial/economic experts. They have proved themselves wrong so, so many times.

{"commentId":3414615,"threadId":"383954","contentId":"1975980","authorDomain":"sneila"}

1 vote

#58 - Fri Oct 10, 2008 10:21 AM EDT

{"commentId":3427631,"authorDomain":"jkellock7016"}

j-312204

I own stock in a bank..therefor I own a bank. Where's my friquing money???? send cash ok, We all need a little of that , but not credit or stamps for food.

{"commentId":3427631,"threadId":"383954","contentId":"1975980","authorDomain":"jkellock7016"}

1 vote

#59 - Fri Oct 10, 2008 9:29 PM EDT

{"commentId":3430048,"authorDomain":"citizengomezusa1"}

Daretobeyourself

The secret they don't want you to know about their swindling bailout fraud and deception is Derivatives: The Hyperinflationary Bomb Crushing The International Financial System Paulson and all the other central bankers have been lying through their teeth about their ever-changing so-called bailout swindles. The real problem, that none of them wish to talk about, is the mass of derivatives obligations, that are in the quadrillions of dollars.

The derivatives bubble is the "hyperinflationary bomb, crushing the international financial system," warning Notice, "Until you just shut down the whole derivatives trade--wipe these gambling obligations off the books of the financial system--you are just kidding yourself." "It is time to break the silence on derivatives. The true, hyperinflationary factor in the situation is the unregulated, insanely leveraged derivatives trade. This is what is killing us. This is the great crime of Alan Greenspan."

According to the most recent data, released June 30, 2008 by the Office of the Comptroller of the Currency, the three largest American bank holding companies, JP Morgan Chase, Bank of America and Citicorp, had current outstanding derivatives contracts, totaling $179.4 trillion dollars. The three banks combined have total assets of just under $5.6 trillion!

As of Dec. 31, 2007, according to the Bank for International Settlements, the total over-the-counter and exchange-traded derivatives totaled more than $675 trillion. However, these "authoritative" figures are, according to Executive Intelligence Review analyst John Hoefle, grossly understated. The true figures, Hoefle estimated, are well-above a quadrillion dollars.

Unless and until you deal with this derivatives bubble, which cannot and should not be bailed out, you are just kidding yourself. It is time for Hank Paulson to swallow the only real medicine: bankruptcy reorganization of the entire, dollar-based financial system. And the first step in any such bankruptcy reorganization would be the cancellation of these quadrillions of dollars in pure gambling obligations. Without such action, this planet is doomed to a horrible dark age, just like the dark age of the 14th century, -that followed the collapse of the Lombard banking system.

{"commentId":3430048,"threadId":"383954","contentId":"1975980","authorDomain":"citizengomezusa1"}

1 vote

#60 - Fri Oct 10, 2008 11:58 PM EDT

{"commentId":3438168,"authorDomain":"Crossworks"}

steve48

I don't know if anyone else has mentioned this, as I haven't read every comment. It was reported on altnet that the 3rd Infantry Brigade of the U.S. Army was moved around the capitol where it was on "maneuvers" while Congress debated and voted on the $700 billion sham. While the city was surrounded by our own troops, Senators and Representatives were being called and told that Marshall Law would be instituted if the plan was not approved.

So, not only was this taxpayer giveaway voted on by our elected Congress, it was done so quite literally under the gun, with the threat of a governmental takeover....funny, I though Congress WAS the government. The President was authorized to activate the 3rd Brigade because of legislation passed during the earlier rush to judgement that created the Homeland Security Act. So Congress at that time voted to allow itself to be held hostage by it's own government, and it gave the President unprecedented power. Now it's coming back to haunt them.

The grease that lubed the machine is disappearing, and the Executive branch appears to be poised to declare that the elections can't be held at this time, probably because of the worldwide financial crisis. Does any of this sound familiar?It wasn't a Republican back during The Great Depression, it was a Democrat, so let's not go pointing fingers. Either party is capable of acting to seize power. That's what it's all about, anyway.

Comfortable, America? Did you hear the altnet report on any of the "major" networks or other media centers? Doubtful. Wouldn't want to panic the citizenry.

{"commentId":3438168,"threadId":"383954","contentId":"1975980","authorDomain":"Crossworks"}

#61 - Sat Oct 11, 2008 3:28 PM EDT

{"commentId":3438339,"authorDomain":"Crossworks"}

steve48

This is ludicrous. One dollar to "rescue" or "bailout" Wall Street is of no value compared to the health of one soul. If the White House and Congress had souls, they would act twice as fast to alleviate the suffering of everday Americans as they have done to bolster their financial interests. Maybe it's time to tear down the financial barricades and determine the standard of our health in terms of the percentage of our people having homes that are theirs, enough food to feed their families, and the knowledge that health care will be there for them when they need it. Who needs our "health" determined by whether the stock market rises or falls? It is a false measurement by standards that really matter. Oh, sorry, it matters to those who want to drive Bentley's and own 2nd homes in private golf communities in the Carolinas, 3rd homes on the Northeast Coast, 4th homes in the Southwest or outside the U.S., and primary homes wherever their "jobs" are. But.........maybe their time is over?

{"commentId":3438339,"threadId":"383954","contentId":"1975980","authorDomain":"Crossworks"}

1 vote

#62 - Sat Oct 11, 2008 3:46 PM EDT

{"commentId":3441348,"authorDomain":"hotelalpha"}

Hotel Alpha

To the World,

Man made problems cannot be fixed using man made solutions. A good example is medicine. It introduces side effects and therefore problems more than the problem it is supposed to cure.

The solution to our present problems, be it anything, must come from Heaven. It must come from God. But Heaven will not provide the solution while we continue to have laws that are in direct contradiction to what God handed to us through Moses, i.e. the Ten commandments. There again, man made laws, be it on any area, field or subject, are flawed unless they were made with the guidance from God. And many Americans no longer have faith in God. They have shifted their Faith to themselves. A clear proof is what Bush said in the G7 meeting, the we together can overcome this catastrophe. God is no longer in the equation and that is extremely dangerous. We exclude in our day to day life the Most Powerful Who can move, change, do, solve anything and everything in this world.

We must remove the impediments, the obstacles, the hindrances to Blessings, Help, Assistance, Graces etc that are readily available from Heaven so that the Blessings, Help, Assistance, Graces etc can and will flow freely to all of us in the world today. If we dont we are and will be faced with the gruesome prospect of WWIII as what Mother Mary said in her messages to young children at Medjugorje, at Fatima, at Lourdes, at Garibandal and so many other places.

Do we have the guts to turn things around????

{"commentId":3441348,"threadId":"383954","contentId":"1975980","authorDomain":"hotelalpha"}

#63 - Sat Oct 11, 2008 8:23 PM EDT

{"commentId":3441410,"authorDomain":"hotelalpha"}

Hotel Alpha

To the World,

Man made problems cannot be fixed using man made solutions. A good example is medicine. It introduces side effects and therefore problems more than the problem it is supposed to cure.

Do we have the guts to turn things around????

{"commentId":3441410,"threadId":"383954","contentId":"1975980","authorDomain":"hotelalpha"}

#64 - Sat Oct 11, 2008 8:29 PM EDT

{"commentId":3927077,"authorDomain":"ulrmar"}

FreeThinker-706372

I do not think it's a bad idea, but there must be some limit on how much of a stake the government can acquire. When too much power falls in any hands, public or private, it can lead to corruption. I do not think the government should own more than 20% of the total amount of stakes out there for any one corporation. It is a controlling interest, and if the government is going to bail these banks out, then it should have at least the possibility of seeing a monetary return on that investment. This idea is not limited to banks and could apply to any publicly traded corporation. The potential return on investment could eventually eliminate the need for the government to tax income. Participation, not domination, is the key. Infact, it may help the government better understand the needs and demands of business and create true regulation that protects people without extreme impact on growth. This must be done very delicately.

{"commentId":3927077,"threadId":"383954","contentId":"1975980","authorDomain":"ulrmar"}

#65 - Wed Nov 5, 2008 9:47 PM EST

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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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Treasury plan to buy bank stakes carries risks

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