Treasury Expected To Pump $250 Billion Into Banks In Exchange For Stocks

The Treasury Department is expected to announce that it will be pumping $250 billion into banks both large and small tomorrow… and the FDIC is expected to offer an unlimited guarantee on bank deposits in accounts that do not bear interest.

The NYT explains:

Treasury Secretary Henry M. Paulson Jr. outlined the plan on Monday to nine of the nation’s leading bankers at an afternoon meeting, officials said, in which he essentially told the participants that they would have to accept government investment for the good of the American financial system. This capital injection plan will use a huge chunk of the money authorized for Troubled Assets Relief Program.

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.

The result of this “capital injection”? The US government will own preferred shares in all, yes all, of the major US banks, and will be paid dividends. The injection will not be voluntary, says the NYT.

Expect a press conference by President Bush tomorrow morning, announcing the plan.

U.S. Investing $250 Billion in Banks

(Photo: donbuciak )

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  1. CaliCheeseSucks says:

    Does this seem like a terrible idea to anyone else? To me, this appears to be a completely socialist move (ironically, Obama’s the “socialist” to republicans) that will not end well. I don’t profess to know a whole lot about the economy, but this just seems like a really bad idea and has me a little worried about our financial future.

    • TorrentFreak says:

      @CaliCheeseSucks:

      No you are right. It IS socialism on a massive scale.

      • anonymousryan says:

        @TorrentFreak: It’s sad to see that “socialism” is still the fright word is was during the cold war, what with socialist democracies flourishing in Scandinavia and other (less socialist) policies in mainland Europe.

        In spite of that, this isn’t an unheard of policy. Particularly, the Japanese (hardly socialist in any context) used this method to stop panic in their banking industry. The problem with Paulson’s original proposal is that buying up toxic debt relieves these banks from failure but does little to encourage faith or renewed investment. This direct injection of capital will give banks liquidity allowing them to extend credit. (This credit being the basis of our economy as it allows people to invest in new companies, new ventures, purchase big ticket items like homes and cars, etc.)

        The injection of capital is probably the best means to solve the current frozen state of the credit market and aside from giving the money outright asking for partial ownership to ensure proper business practices and recoup some funds is hardly outrageous. The government won’t be running these firms or telling them where and what to invest in, it’ll simply be monitoring them (something you could argue if they had been doing might have avoided this mess in the first place).

        So this bogeyman of socialism is really terrible fear mongering.

        • StrangeTikiGod says:

          @anonymousryan: hear, hear!

        • CaliCheeseSucks says:

          @anonymousryan: I’m not attempting to fear monger socialism at all. I’m actually in support of some “socialist” policies (national healthcare, first and foremost). But to have the government invested in banks at all just appears to be an unhealthy idea to me. I’m not comfortable with the government controlling an institution my money is in. You say that they’re not going to tell banks where and what to invest in, but there’s no way to predict that. The government sucks with it’s own finances, why do I want them controlling mine?

          • IamNotToddDavis says:

            @CaliCheeseSucks: to have the government invested in banks at all just appears to be an unhealthy idea to me.

            It is. But the market has come to Uncle Sam with its pockets turned out, and both parties are asking how much they can give “to save everyone from this panic”.

            It’s partial nationalization of our banking system, and gives too much authority to unelected representatives to have a stake in our government.

            What’s hilarious to me is that you’re scared about the government taking over the banking system, yet aren’t afraid of them screwing it up with the healthcare system

            Here’s a reality check: they will screw up both. It’s a FORGONE CONCLUSION.

            The only question now is how bad the next four years are going to be while we relearn the lesson (for the umpteenth time) that a centralized bureaucracy DOESN’T WORK and kick out of office who ever happens to be in charge.

            Again.

            Funny, no one was whining about the Economy in 2004, eh?

            Wonder why.

            • Trai_Dep says:

              @IamNotToddDavis: Actually Progressives and teh Liberals were, especially the commentators. That another bubble forming was obvious, as well as what a train wreck would ensue once unregulated trillion-dollar-shadow-banking-system “free” from government “interference” were set loose on our economy by the Free Market Fundamentalists.
              Of course, Greenspan and the GOP said, “Trust us – we know what we’re doing”. In fact, it is core of who they are.
              Much like Katrina, come to think of it: if government is supposedly always the problem, you’ll do a lousy job of running it.
              We’re for sustainable growth and the results speak for themselves.
              It’s a shame the other side (and conservative Dems) aren’t.

        • Excited_Utterance says:

          @anonymousryan:

          Yes, thank you for this comment to reaffirm my faith that some people know some stuff. A lot of people calling this “socialism” have no idea what socialism actually looks like. The bailout? It’s just the government owning something. That’s not socialism in the Marxian sense (Oh no! I said his name!). The polite word for this is state socialism. The less polite word if it gets out of hand is national socialism.

      • ARP says:

        @TorrentFreak: Up until recently, it was Facism (a right wing concept), where the government would provide funding (but would not own) to banks. Now it’s a bizarre combination of facism and socialism- which is odd since they’re on the opposite ends of the political spectrum (unless you view the spectrum more like an arc or 3/4 circle where far right and far left aren’t that far apart)

    • bnosach says:

      @CaliCheeseSucks: what’s so bad about socialism? People are just afraid of the word itself without even fact checking first.

      • Tux the Penguin says:

        @bnosach: The problem with socialism is, and as has been proven in Europe, is that it does a number in keeping people where they are, ie, there’s little movement in the income quartiles like there is in the US.

        Socialism is, at base, taking from one to give to the other without regard to why there is the difference. It would be like you getting a 4.0 and your buddy getting a 2.0, so they lower your grade to a 3.0 and raise his to a 3.0. Does that make any sense?

        The duty of the government should be the equality of opportunity, not equality of results. I grew up with people who had almost the same opportunities I did (and more), but our outcomes have been as varied as they come. Some are happy, others are rich and others are poor, and still others are miserable.

        • TheLadyK says:

          @Tux the Penguin: This would make sense, but the movement between classes has stagnated in the US, and poverty issues are not completely related to ability and effort.

          For instance, lets take your grades, that only makes sense if you both go to the same school. If you went to Inner City Central and your buddy went to Private Elite, college might look more favorably on your buddy, even though your numbers are higher. The ability to buy opportunity (through schooling, connections, unpaid internships, etc) that are simply unaffordable to the lower classes makes the stagnation in class status inevitable.

          But yes, the gov’t should be focusing on equality of opportunity – education and basic, preventative health care for all.

          I prefer the stock injection to just handing over money. I would be happier if I was hearing more about how temporary this was and if it were voluntary for the banks involved. (You’re free to come crying to Daddy for money… but its a short term loan and until its paid back, you are not going to parties on Friday night.)

          Why would it be preferable to just throw money at the issue without attaching strings? Who looks at a drug addict and says “Here have $1,000.” without asking them to get to rehab?

        • ARP says:

          @Tux the Penguin: True, but the “bottom” is much higher in socialist countries. Granted, its a bit more difficult to become the multimillionare that you’ve always dreamed you’d become because the taxes are much higher on the wealthy. So instead of two Royce’s, you only get one. So, I guess I would rather know that I won’t get put out in the street if something goes wrong rather than cry about not being able to afford 3 houses. It’s a personal preference- some would rather have zero safety net knowing that they could become rich beyond their wildest dreams. I’m not that greedy.

          • Tux the Penguin says:

            @ARP: You do know that France and England have a higher incidence of homelessness than the the US? Very, very rarely do people end up “on the streets” when their world implodes.

            I guess its a decision on how risk-averse you want to be. In America, its not uncommon to hear about people who made themselves rich, lost it all, and did it again. In the US, you can just as easily lose it all as make it.

            • Parting says:

              @Tux the Penguin: Per citizen, in France, there is much more illegal immigrants, than in USA, on a limited territory. So you cannot compare their problems to yours. Life is way different, and socialist services is just one of many factors.

    • XopherMV says:

      @CaliCheeseSucks:

      One of the basic tenets of a market system is that when you use your money, you get something back in return. I use my money at McDonalds, I get a Happy Meal in return. That is the heart of capitalism.

      Why that idea suddenly becomes bad when one party is the government is beyond me. It seems to me a good thing that the government is getting something in return for all the money it throws around. Up until now, these corporations have been treating this government money like charity or welfare. Now, these corporations have a disincentive to raid our government piggy bank.

  2. motojen says:

    This sends shivers down my spine. Pardon me while I go check my food stores and my ammo stockpile…..

  3. PsychicPsycho3 says:

    … I don’t think I want the government owning my money.

  4. DomZ says:

    IIRC the government won’t have voting rights as a result of the capital injection.

  5. StrangeTikiGod says:

    It worked for Sweden in the 90s, here’s hoping it works for us.

    And for everyone jumping at their shadow whenever anyone mentions the specter of “socialism,” bear in mind we tried unrestrained laissez-faire capitalism, and look where it got us. Time to try something else.

    • inspiron says:

      @StrangeTikiGod:

      NO unrestricted laissez fair is what got us from some nothing rebel state in the late 1780’s to a super power buy 1900. what caused this mess were in now is goverment regulation (the Community reinvestment act and the existence of Fannie mae and freedie mac) and goverment screwing with free market capitalism.

      The federal goverment should stick to maintaining a defensive military, printing money backed by hard assets and running courts! everything else can be handled by state or local governments and by the free market.

      Right now this country is going at least an extra trillion dollars into debt to bail out these banks because of the government’s mistake they made in 1977 and agian in 1995, now were going to spend what is the equivalent to $10,500 per household to buy up these bad debt and nationalize these companies.

      History repeats it’s self and just like other great civilizations this one is heading towards oblivion. First comes oppression, then revolution then freedom then complacency, fear and laziness then back to oppression and revolution.

      Freedom and the free market is the the only morally right system, but is never lasts as weres seeing.

      • lukobe says:

        @inspiron: well put. let no one think we’ve been actually having laissez-faire capitalism these past few decades. all that corporate welfare certainly isn’t laissez-faire.

      • ARP says:

        @inspiron: Ugh, I’m so tired of the argument that the community reinvestment act and Fannie and Freddie was the primary culprit. Stop listening to Faux News and do your research. Provide me the answer to the following questions:

        1) What percentage of the bad loans were subject to this Act (hint- its not all of them. Many banks are exempt)?

        2) What percentage of Fannie/Freddie loans backed loans are bad.

        Until you answer those questions, you have no basis to blame the Community Reinvestment Act or Fannie/Freddie.

      • XopherMV says:

        @inspiron:

        Actually, the term superpower was not used until 1944. The term would not apply to the US retrospectively before 1944. Up until the 1940’s, the US was largely an isolationist country that refused to become involved in world affairs. On top of that, other countries had larger militaries, navies, and economies.

        The main reason we became a superpower had little to do with our economy, especially considering the USSR also became a superpower at the exact same time.

        No, our luck was that our production facilities, like the USSR’s, were not bombed or otherwise destroyed in the war.

    • Tux the Penguin says:

      @StrangeTikiGod: What we are seeing how is the classic result of how a democracy would lose its freedom. People are scared, so they’re willing to give up some freedoms for “security.”

      Rome did it whenever there were enemies at the gates, suspending the Democracy and appointing a man to be dictator. Eventually, they picked one who wouldn’t give the power back.

      • StrangeTikiGod says:

        @Tux the Penguin: you seem to be confusing the free market with freedom, period. They’re two very different beasts.@inspiron: Actually the big government mistake was in the late 90s and early 2000s, when we lifted the restrictions that kept banks from making these stupid risky bets in the first place. What we’re seeing is not the result of government regulation, but the result of DEregulation lack of oversight.

      • StrangeTikiGod says:

        @Tux the Penguin: I fail to see how freedom is suddenly narrowly defined by the economy. The economy is like a sociopath suddenly turning on its parent and trying to kill it. Corporations exist for a sole purpose: to prolong their own existence for as long as possible, building themselves up as much as possible, and not caring how they do it. That’s not a healthy mindset, especially for something that sees itself accountable only to stockholders, not the nation that made its existence possible in the first place.

        My point of view is that the government, by nature of being as free as it is, brought the mega banks into this world, and it can damn well take them out if it likes. It is, after all, the entity that granted the corporate charter in the first place.

  6. Maurs says:

    I’m certainly no economist, and I don’t even have a passing familiarity with the theories behind why this will or won’t work to stabilize the economy, so I can’t really say whether I agree or disagree with the decision. All I can say is that while it’s not the same as seizing some oil wells or mines in your tiny third world country, it sounds a lot more like nationalization than socialism.

  7. LeoSolaris says:

    Peachy… Another revenue source… why does this feel sort of long planned?

    Just remember, it is not wither or not you’re paranoid, it is wither or not you’re paranoid enough!

  8. twophrasebark says:

    I haven’t heard a lot of suggestions from the folks that believe in deregulation lately and the whole letting the markets decide scam. It seems the market has decided that deregulation sucks. Haven’t we learned this lesson before? Like a dozen times?

  9. Darren W. says:

    For those who think deregulation is at fault for this mess, please explain the following sequence of events as I’ve observed them. I’m no economist, and I’m looking at it through libertarian colored glasses, but still, please offer a different perspective if you can. The economy was in decent enough shape until the 9/11 terrorist attacks, after which people were feeling insecure in general, and decided to stop spending so frivolously. As a result, the economy suffered a little. The FED (government intervention) lowered interest rates. As a result, everyone rushed into taking advantage of the chance to buy a home for little interest. Thus, the cost of housing went up. More people saw the chance to buy cheap housing, and saw that housing was quickly gaining in value, so more people jumped in. Many of them fudged the paper work to do so. Of course, the housing inflation couldn’t continue forever. When interest rates started going back to where they should have been to begin with, and would have been if it weren’t for GOVERNMENT REGULATION, people started to get foreclosed on. Then the house of cards started to collapse. Am I the only one who sees that this entire mess was caused BY the government?

    • Decius says:

      @Darren W.:
      The FED (government intervention) lowered interest rates.

      Wait, wait, aren’t Libertarians usually the first ones to point out that the FED isn’t government, but privately owned?

    • zeroraveson says:

      @Darren W.: Well, I would argue that isn’t really what happened … but rather the repeal of Glass-Steagall in 1999 by the Republican Congress and President Clinton, which allowed WaMu or Wachovia to sell their Mortgages-Backed-Securities to investors. So now, with the ability to sell MBSs, the people at the local Wachovia or WaMu have incentives to sell as many Mortgages as possible, instead of having their main incentive as selling as many Mortgages to people who can actually pay off the Mortgage, given their income and financial situation. This video: [vimeo.com] gives a better explanation than I can here.

      Anyhow, Deregulation *would* be the best way to make the market efficient in an *actual* free market (ie no regulations at all, no FDIC, no ability for banks to borrow from the Fed Discount Window, etc). In such a market, if the bank failed, then depositors would lose their money, but the financial services market would be more efficient. Of course this isn’t the world we live in, we do have deposit insurance and other things like it, so I would argue regulations are a better way to give more people the security of deposit insurance and similar things, while still curbing practices that would be destructive if left unfettered.

      Bottom line for me: having deposit insurance makes banks more reckless than they otherwise would be, so smart regulation can be used to prevent a lot of this recklessness while keeping policies like deposit insurance in place.

      • HRHKingFridayXX says:

        @zeroraveson: It isn’t necessarity the deregulation or the housing market that bothers me, but the fact that those things allowed a fair amount of people literally get paid by banks year after year for flipping houses.

      • Trai_Dep says:

        @zeroraveson: Clinton was delivered a veto-proof majority bill by Phil “McCain’s #1 Economic Guy” Gramm, so his not signing the Glass/Seagal bill would have made no difference.

    • twophrasebark says:

      @Darren W.: “More people saw the chance to buy cheap housing, and saw that housing was quickly gaining in value, so more people jumped in. Many of them fudged the paper work to do so.”

      No. The banks and financial institutions fudged their own financial models and lent to about anyone with a heartbeat.

  10. chrisgeleven says:

    This apparently fixed a very similar crisis in Sweden during the early 90s. I can see why they are trying this.

  11. Red_Eye says:

    I’ve been saying for 5 years that Capitalism was just as doomed to go through a fall like Socialism did. No matter what your ism is when the oligarchy gets to heavy to stand on Joe Six packs back, then the rich will fall. The only thing left is to see in which way they enslave Joe Six pack to pick up the pieces of their shattered rich lives.

    • Tux the Penguin says:

      @Red_Eye: And, as I just posted above, the Joe Six packs are so terrified about their jobs and their retirements, they’ll willingly put on those shackles for the “security”. Such a sad state in America today. I feel sorry for my children.

  12. PhilanderDiomedes says:

    Darren – your comments show why libertarianism is just another goofy -ism that has nothing to do with the real world, like Marxism. The economy was not really doing well before 9/11, the easy credit that caused this mess in large part was already working it’s magic, setting us up for the fall. And while that is the government’s fault the banker’s were the ones who took mortgages and came up with creative ways of bundling them up in various financial instruments that are the ultimate problem with the current situation. Any solution to this long term has to involve breaking up the big banks. And we need to bring jobs back to the US, not offshore them to India and China, and destroy the middle class. But we are a nation of gullible people, easily led by business interests and the politician’s they own to hide in fear anytime someone uses buzz words, like “socialism” or “terrorism”.

  13. sleze69 says:

    Ayn Rand wrote about this about 50 years ago. Hopefully the rest of her predictions won’t come true.

    • opsomath says:

      @sleze69: Yeah, I get the same feeling.

      In re the article; can someone explain to me what precisely the authority being used here is, to tell the banks that they MUST accept this buyout? (That’s what it is, by the way. A partial buyout. If they get a wad of cash, it’s a bailout; if they sell their stocks to the gov’t, it’s a buyout.)

      • anonymousryan says:

        @opsomath: It’s funny because Greenspan was such an Ayn Rand fanatic and he had been warned about a real estate bubble and failed to take any regulatory action, instead pushing the Bush administrations “community of ownership” B.S.

        [www.nytimes.com]

    • Trai_Dep says:

      @sleze69: So did John Steinbeck. He got a Pulitzer and a Nobel prize out of it. What did Rand get?

  14. czarandy says:

    “Capitalism” isn’t going to fail. It’s survived far worse. There *is* a role for the governments in markets, not necessarily because it makes them more efficient, but because it can help to smooth the bumps.

  15. Foxtrot Uniform Charlie Kilo says:

    zeitgeist maybe?

    but who believes in that

    • Ein2015 says:

      @adifferent_hero: Nah… zeitgeist has more smoke, mirrors, lights, and show than it does anything useful. It was a nice watch though.

      Remember, always treat EVERYTHING with a healthy dose of skepticism!

  16. Bladefist says:

    I’ve never wanted to move to another country more then I do now.

  17. Shadowman615 says:

    OK, but is this actually going to fix the credit freeze? Will these banks start lending money again, or are they all just going to stuff all of this money into a vault and roll around in it?

  18. mzs says:

    I don’t get the commenters sometime. A few weeks ago everyone here was complaining about how the Paulson plan would saddle us all with the toxic debt. Now we have just the beginning of the details emerging from a plan very similar to what Great Britain just did and what worked relatively well in Japan and Sweden in the past and now the majority of people here are bringing-up socialism, the zeitgeist, and Ayn Rand. Listen socialism and zeitgeist have negative connotations, why are relatively smart people on here falling for that BS just on the loaded words alone, and don’t get me started on that homophobe and sexist Ayn Rand. I simply do not understand why smart people subscribe to her newsletter.

    I want to know the details as much as everyone but at $250,000,000,000.00 you cannot just go and put some buy orders in at the exchange. That alone would perturb the prices too much. There simply has to be a special mechanism created for this, what the Times reporter simplified to as the “would have to accept” in the story. In what I have read there are still two weeks to go before this happens, in a few days we’ll know more about how this will actually work and then we can make rational arguments. At this point comparing what we wrote in the past compared to this makes us look like loons.

    • Trai_Dep says:

      @mzs: Because some are happy at throwing $700B at recklessly-run businesses with no strings attached, but have reservations when reasonable steps are taken to insure that tax-payers aren’t left holding the bill?
      That’s how it seems to me, at any rate.

  19. Sure I could agree with you, but then we'd BOTH be wrong. says:

    Someone’s gotta say it….

    CREDIT UNIONS!!!!

  20. halcyon22 says:

    One thing to note is that the $250B comes out of the $810B bailout money.