Treasury may buy equity in US banks

Posted Oct 9th 2008 4:03AM by Douglas McIntyre
Filed under: Industry, Recession, Financial Crisis

The UK did it, so why shouldn't the US? The Treasury may actually buy interests in some American banks as a way to quickly get them capital. It would be an unprecedented move and an unwise one.

According to The New York Times, "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."

While the US taxpayer is already troubled with the bank bailout, buying bank assets which may later appreciate in value to allow the capital to be paid back is much different than becoming direct owners in the firms.

Owning piece of banks creates two significant problems. When the government eventually sells its interests, will it cause bank shares to drop? What will investors think if the Treasury is putting its holdings on the market? It may cause stocks in the financial companies to drop again.

The other potential trouble is what happens if a bank fails? Is the government's position compromised or wiped out? Buying distressed and toxic loans from banks at least gives the Treasury something it can hold independent from the banks themselves.

Saving the system goes a bit far when it puts Treasury capital at even greater risk.

Douglas A. McIntyre is an editor at 247wallst.com.

Tags: Treasury

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Reader Comments (Page 1 of 1)

10-09-2008 @ 6:00AM

al coholic said...

As irresponsible as the banks have been, government ownership will guarantee years of lawsuits, bloated operating costs, and corruption the likes of which we can't even dream about.

What a nightmare that would be! Every time a loan was approved some lawmaker would be trying to attach pork to it. I say that only partly in jest.

10-09-2008 @ 6:13AM

al coholic said...

Not to mention 300 million pseudo CEO's who are sure they know how best to run the business.

I'm not sure a depression wouldn't be preferable to this solution. At least then, at the end of our suffering things might get better.

Government ownership of companies and all the ramifications of government competing against private citizens in business, and the inevitable fraud that ensues will guarantee that the freedoms our forefathers fought and died for will likely end up in the toilet.....along with the rest of our tax money.