A Very Scary NYT Article On Involuntary Acquisition of Equity (aka Stealing)
I have read some scary NYT articles, but I think I just found the winner (HT2EPJ). Just try to remember what it was like back in, oh, say, August 2007. Try to remember what types of things the government of the USA could and could not do. Now check out these excerpts:
WASHINGTON — Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.
Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.
The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.
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In a coordinated action, the central banks reduced their benchmark interest rates by one-half percentage point. On top of that, the Bank of England announced its plan to nationalize part of the British banking system and devote almost $500 billion to guarantee financial transactions between banks.The coordinated rate cut was unprecedented and surprising. 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.
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There is no shortage of ideas, ranging from the partial nationalization proposal to a guarantee by the Fed of all lending between banks.
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As Washington casts about for Plan B, investors are clamoring for the Fed to lower interest rates to nearly zero. Some are also calling for governments worldwide to provide another round of economic stimulus through expensive public works projects.
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Treasury officials worry that aggressive government purchases, if not done properly, could alarm bank shareholders by appearing to be punitive or could be interpreted by the market as a sign that target banks were failing.At a news conference on Wednesday, the Treasury secretary, Henry M. Paulson Jr., pointedly named the Treasury’s new authority to inject capital into institutions as the first in a list of new powers included in the bailout law.
“We will use all the tools we’ve been given to maximum effectiveness,” Mr. Paulson said, “including strengthening the capitalization of financial institutions of every size.”
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At the Federal Reserve in Washington, officials insisted they had not run out of options and made it clear they were willing to do whatever it took to shore up the economy.Fed officials increasingly talk about the challenge they face with a phrase that President Bush used in another context: “regime change.”
This regime change refers to a change in the economic environment so radical that, at least for a while, economic policy makers will need to suspend what are usually sacred principles: minimal interference in free markets, gradualism and predictability.
Now I hardly need to add commentary to the above, jaw-dropping excerpts. As I said, please try to remember what things were like back in August 2007. If I had shown you the above and said, “This will run in the NYT in 14 months,” you would have blown me off as a paranoid nutjob. “At worst,” you would have said, “they’ll surreptitiously increase their power over the financial sector. But obviously pro-market Republicans can’t come out and openly nationalize banks. This isn’t Venezuela.”
Here’s another interesting twist: In the original Paulson Plan, he didn’t ask for authority to acquire equity in the banks. Remember, that provision was slipped in later, allegedly with the “free market” Republicans kicking and screaming, at the insistence of “liberal” Democrats who wanted “taxpayer protection.”
Now, they haven’t even started buying up the $700 billion worth of bad assets, as far as I know. I know for sure that as late as YESTERDAY, Bush and Paulson were saying, “You’ve got to give this plan [of buying assets] time to work.”
And yet, now they have decided that that option by itself is NOT working (even though this contradicts the timetable they laid out just YESTERDAY for it), and have decided instead that the government needs to “aggressively” purchase ownership in banks, though it might be seen as “punitive” by some analysts.
Now how the heck is an injection of capital in exchange for equity going to be construed as “punitive”? Oh, well maybe it’s because the new plan isn’t even clear if bank participation will be VOLUNTARY, and even HEALTHY banks may not be safe.
Do you folks see what that means? Once you take away the requirement for the recipient bank to sign off on the transaction, then there’s no way to determine a “fair” price. So if those two vague principles come down on the side of more government power (and why wouldn’t they?–the markets will be in need of “help” for years to come), that means the government can look around and spot a company it wants. Then it gives some bogus reason that it needs to ensure stability with this company–remember, the company itself doesn’t need to be in trouble–and it can say, “We’ll give you $x billion and in exchange we own y% of your stock.” And remember, the company can’t even say, “No thanks.”
This is not good.
