Government May Begin Buying Bank Stock Within Weeks

As it is now apparent that the credit crisis has spread to the global economy and has not been contained in any way, the Bush Administration is considering an option included in the $700 billion dollar bailout package that would allow them to invest directly in banks — buying preferred stock in exchange for a “cash injection.” White House spokesperson Dana Perino said taking partial ownership of banks and other moves associated with the financial rescue plan would not be “part of [Bush’s] natural instincts,” according to the NYT, but acknowledged that the situation has gotten sufficiently dire as to warrant a change of heart.

“But when presented with the evidence that the financial crisis about to hit the United States would affect every single American up and down the economic food chain, this president decided that it was important that the government take robust action. That’s why we worked with Congress to establish the rescue package.”

Ms. Perino said the “capital injections” into the banks would involve “an equity stake” for the federal government but would not amount to a takeover.

“Secretary Paulson is looking at all the different tools to figure out which ones should be used at what time and how robustly and how much money to put into each,” Ms. Perino said, referring to Treasury Secretary Henry M. Paulson Jr.

The plan allows the government to take an ownership stake in banks — even healthy ones. In exchange, the banks would get an injection of cash that (in theory) would strengthen their balance sheets and convince them to start lending again.

The Times also says that the recent coordinated global rate cut hasn’t seemed to help much:

Never before has the Fed issued an announcement on interest rates jointly with another central bank, let alone five other central banks, including the People’s Bank of China.

Yet the world’s markets hardly seemed comforted. Credit markets on Wednesday remained almost as stalled as the day before. Stock prices, which had plunged in Europe and Asia before the announcement, continued to plummet afterward. And stock prices in the United States went on a roller-coaster ride, at the end of which the Dow Jones industrial average was down 189 points, or 2 percent.

Even serious free-market type Republicans are starting to warm to the “cash injection” idea:

“The problem is the uncertainty that people have about doing business with banks, and banks have about doing business with each other,” said William Poole, a staunchly free-market Republican who stepped down as president of the Federal Reserve Bank of St. Louis on Aug. 31. “We need to eliminate that uncertainty as fast as we can, and one way to do that is by injecting capital directly into banks. I think it could be done very quickly.”

Administration Is Considering Cash Injections Into Banks

(Photo: Getty)

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