U.S. Bank Nationalizations: One Step Closer

Yesterday, Justin Fox detected a possibly important shift in emphasis from Hank Paulson.

Did anybody else notice that when Hank Paulson was describing in his press conference today what the Emergency Economic Stabilization Act enables Treasury to do, the first thing he listed was "to inject capital into financial institutions"? ...

Yesterday Ben Bernanke hinted that a change in emphasis might be in the offing for the TARP. And today Paulson seemed to confirm it. it.

None of the people asking questions at the press conference really seemed to pick up on this, of course (&%%$# Washington journalists!).

Now take a look, if you can, at the front page of today's NYT. On the web there's a huge headline saying "U.S. May Take Ownership Stake in Banks"; in the paper there's an even bigger double-decker, four-column, top-of-the-page, all-caps headline saying much the same thing.

The interesting thing is that on the face of it there's no news here, beyond a change in emphasis: The NYT could have run the same headline the day after the Tarp bill was passed. But clearly Treasury has been talking more to the NYT than to Justin: The paper talks about a Treasury plan (albeit a "preliminary" one) which "resembles one announced on Wednesday in Britain".

I'm glad that Treasury is making these noises, because the market clearly has no faith at all in Tarp as originally conceived. But most of all I'm glad that Congress insisted on giving Treasury the authority to buy equity as part of the bill. Barney Frank, it seems, has been proven more far-sighted than Hank Paulson.

Comments

[helplessobs...:]

Injecting capital into banks is a far more effective than using taxpayer money to buy toxic paper. With a $1 injection lending can be increased by $10, but you have to remove $10 of debt to move $1 from the loan loss reserve to the bank's capital account. Once this is all over in several years by my reckoning, the banking system can buy back the government stake and return to private status.

2008 Oct 09 10:59 AM

[dw57:]

while we may not like it. the original plan was a hope that if i but these bad assets that the banks would turn around and make loans. that was a very tenuous link. by investing capital in them they are more likely to make loans as the link is stronger they now have capital to invest. no guarantee they will though. they are still so fearful that they will loose their investment because they don't know enough about their investment. seems a lack of transparency is the biggest issue.

2008 Oct 09 11:08 AM

[Lawr:]

these assholes are either lying or totally incompetant. i am not sure which is the scarier - crooks or idiots in charge of the economy

bravenewfilms.org/blog...

2008 Oct 09 11:24 AM

[2bz:]

As disgusting as the government bailout/nationalizatio... of failing banks is in principle, it looks like there is finally some inkling of a clue in the Treasury and the Fed. I hope they don't overpay for stock now though. At least with the "worthless debt" there was some recourse against the borrowers to recover the money, with stock all bets are on the emergence of the bank from insolvency. However, the losses in insolvent banks may still not be appropriately realized. I still think that the best course would be to fund new banks without toxic baggage.

2008 Oct 09 12:02 PM

[JRBH:]

To paint an even bleaker picture than Lawr above. We have neither crooks nor idiots running these games but idiot-crooks or crooked-idiots.
The best thing that must come out of this debacle is the universal knowledge that an Ivy League MBA with a high speed commuter shouldn't be trusted to manange a Kook-Aid stand.

2008 Oct 09 03:01 PM

[PainfullyAware:]

I agree with JRBH.

Doom Approaches.

Only Fools Act Without Assessment And A Plan. The Bailout Passed With Neither.

The Worst IS Yet To Come.

2008 Oct 10 03:16 PM

[Lawr:]

I concur with the above. The fate of the Us is sealed - some people are still unaware of that.
It will eventually become a disrupted third world nation.

2008 Oct 10 04:40 PM