Wednesday, October 15, 2008

So we partially nationalized our banks?

Mostly good news. Dean Baker:

Okay, we all should be glad that Treasury Secretary Henry Paulson seems to have abandoned, or at least sidelined, his TARP program and instead decided to directly inject capital into the banking system. The problem is under-capitalized banks and that is best solved by giving the banks more capital.

But, there is a big issue about the terms under which they were given capital. Secretary Paulson decided that a 5 percent rate of return on preferred share was good enough for the taxpayers. Warren Buffet got a 10 percent return for his investment.

No one would confuse Henry Paulson for Warren Buffet, but come on -- he could get a 4.0 percent return buying treasury bonds. I can't believe that he had such bad business sense when he was CEO of Goldman Sachs.

The markets gave Paulson's investment strategy a big thumbs down from the taxpayer perspective. Goldman Sachs shares jump 10.7 percent after the details were made public. Shares of Bank of America rose 16.4 percent and Citigroup's stock rose 18.2 percent. Obviously the market thinks that Paulson gave the banks a really good deal.

The only part that I don't understand is why exactly he did this, especially after specifically stating that he wouldn't. From the Guardian:

Buying banks' shares amounts to a U-turn for the embattled US treasury secretary, who initially wanted to spend a $700bn emergency fund by simply picking out distressed assets from banks' balance sheets.

Paulson told Congress last month that "the right way to do this is not going around and using guarantees or injecting capital", arguing that Japan had limited success with such a policy during a banking crisis in the 1990s.

Last week's stock market meltdown forced Paulson to take a more radical approach - but he made it clear he was doing so with distaste. Speaking in the treasury's ornate Cash Room, he said: "Government owning a stake in any private US company is objectionable to most Americans - me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."

This is strange to say the least. I'll write more on the subject when I feel like I have a better idea of what the hell is going on.


  1. I think Bolivia and Venezuela have got the idea right: nationalize international companies that are successful so the populace can actually benefit from their profits (usually derived from the country's natural resources anyway).

    In contrast, we're nationalizing international companies that are in the crapper so that our taxpayers are henceforth yoked to their executive follies and extravagances.

    I'm all for socialism in the US, but we should try not to suck at it so much.

  2. I will be happy for precisely as long as inflation remains under 5%.