Did you feel the tremor in the force? Grab your lightsaber something big has happened. Remember the bazooka metaphor with Paulson & Co? Well, bang bang my friend, that trigger was pulled.
Imagine your government has just written you the first of many checks that will total $700 billion or more. This one is worth $250 billion. You promised you’d use the money to buy distressed debt from the banks at a big discount. So what are you going to do with that $250 billion? Not buy distressed debt, right…
Hank Paulson has brought on Neel Kashkari (he looks scary) to head up the details of the bailout. Kashkari is 6 years out of graduate school. He was just learning about girls during the last banking crisis in the 80s. Either he’s really smart or he’s got dirt on Paulson. Anyway, I guess the two of them decided it was best not to do what Paulson initially said, but rather invest the money in 9 banks.
The banks are the 9 largest you’ve likely heard of, so I’m not going to list them. The banks will issue new preferred stock (a type of stock not openly traded and does not carry and real ownership in the company) which the Treasury will buy. Certain restrictions come with the offer, including a possible cap on executive pay. Like any other preferred holder, the banks will have to pay dividends to the Treasury. They must also use their new (fake in my opinion) money to stimulate the debt markets. That means they have to loan it out, and not hoard it like they’ve been doing with what little cash they have. The idea here is by issuing preferred stock the banks will have enough money to loan to eachother again, the back-bone of our lending markets.
The banks must buy back the preferred stock after a period (likely decided by the next Treasury Secretary). I would guess 2-5 years. If everything works out the Treasury will not only collect dividends but also stand to profit from reselling the preferred shares back to the banks. This has never been done before, I’m anxious to see the end result.
What will happen with the other $450 billion? That hasn’t been decided yet. There is still hope they might use it like they promised, to buy distressed debt. Honestly at this point I’d rather we sit back and wait to see what happens with this first round. I want the banks to hold bad debt, not the government. There is a lot of weird stuff going on right now. For the moment though, we are all invested in the success of the banks. The United Banks of America.
 By The Weakonomist |
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