Will the U.S. Now Begin to Take Ownership Positions in Banks?

From the NY Times: U.S. May Take Ownership Stake in Banks

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 …

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.

Hat tip CR who says, “The proposal resembles one announced on Wednesday in Britain.”

Sounds like the Treasury is trying to work as fast as they can.

58 thoughts on “Will the U.S. Now Begin to Take Ownership Positions in Banks?

  1. I can’t find a link, but someone high up in Washington Federal indicated that weakest banks couldn’t take advantage of the bailout, because it would affect their ratios. Assuming that’s true, perhaps this is the only way to help the weakest banks.

  2. Let aside rescuing the home-owners, the Fed is trying to rescue itself.

    Markets crash from oversold positions …. tick tock tick tock

  3. Ardell, you should watch Leno, he has a million of those he’s been telling as Rodney Dangerfield. I only remember one more:

    Times are tough. I went to the bank today. They stole MY pen!

  4. Frontier Bank: FTBK down 21% (7.30/share) as of 10:15am PST ….today.
    Banner Bank: BANR down 12.6% as of 10am PST…today.

    Anyone noticing interesting behavior of public or discussions waiting in a line to buy or transact something?

    I went to get some milk last evening at the store. This is around 10pm’ish. Two men waiting at Coinstar Machine. When I check out another patron gets in line.

    Office had two mobile escrow signings yesterday…… Banking/Credit/Real Estate Crisis dominated the discussion. Sure is a change from past discussions of “all the equity I stand to gain.”

  5. More nonsense. If they really want to free up the markets, all they need to do is just get rid of the capital gains tax altogether. Just eliminate it outright. I would bet a steak dinner the day after that announcement everybody and their grandmother would be back in the markets. Then to top it off, suspend mark-to-market accounting rules until things stabilize or indefinitely.

    Of course, this would never happen because the left would start with the “tax breaks for the rich” stuff…

    I am sure this wouldn’t cost us $700 billion and would probably have more of an impact.

  6. Tim,

    Dustin or Jillayne will need to help you on that as to fixing the one above. I sent them an email as I can’t get into your comment to fix it.

    In the future, before you post a comment, make sure to look at the name in the name line below your comment. If you are using the same computer, it will automatically have the name of the last person who posted a comment and you have to change Lynlee’s name to yours before hitting “say it”.

  7. Kary,

    If I weren’t a banker back in the Free Toaster days, it may not have been so funny to me. I’m a Letterman watcher. The only time I watch Leno is live in Hermosa Beach when he tests his material in front of a live audience at The Comedy Club before he uses it on a show. Haven’t done that in years.

  8. I first learned the “stock injection plan” clause made it into the bill, to the surprise of many, when listening to this weeks broadcast of This American Life.

    In this episode Alex Blumberg and NPR’s Adam Davidson explain what happened leading to the bailout, including what regulators could have done to prevent this financial crisis from happening in the first place.

    As I understand it, the government would be considered a “preferred stock holder” – and the banks aren’t gonna like it.

    You can find the podcast “Another Frightening Show About the Economy” here.

  9. #15 : Any new predictions for the Dow?

    See my post #3 yesterday morning : Markets crash from oversold positions …. tick tock tick tock

    We were oversold and this was the classical pattern I was expecting in the next 3 trading days – probably on Monday after this weekend. Classical 1987 pattern. But we had an early surprise 🙂

    When the Dow couldn’t hold 9500, it was obvious we would have a 20% correction.

    There will be false bounces but they cannot be sustained. Do not get suckered in.
    Gold has to cross its resistance around 925 and stay above it for a day or two at least and then things become interesting. Then Central banks start panicking.

    Perfect waterfall crash. Now we will see the see-saw after effects based on who wants to get out and who wants to get in.
    All all sorts of government rules will be made from thin air.

    Governments lie … charts cannot lie. When does the US file for bankruptcy ?

    Que sera sera.

    Think deeply, trade well.

  10. Hi BombayTrader,

    What about people who own stock inside a retirement account who can’t just “sell” their stock without taking a big IRS hit. Should they just hang on and go long on stocks?

    Thanks for stopping by again tonight.

    Tomorrow should be…interesting. I hear that the President is going to address the nation again.

    The average joe is now starting to panic. If more people rush to withdraw from money market funds, then we have even more problems. Over on the CR blog, there is a long dialogue going on about stocking up on commodities. Maybe I should go to Costco tomorrow 🙂

  11. Hi Jillayne (#18),

    I am not an expert and would refrain from advising – but here are my observations and ideas. But these depend on a persons age and lifestyle and investment horizon.

    1) It is too late to sell in the retirement accounts. Perhaps reduce a little in the next rallies – but do not close out. In the long run markets the markets will go up (7-8 years) – so if one has the patience it will pay off.

    2) Contribute to 401(k) etc, but prefer that new contributions be added to money markets. One can always switch funds later – but do not chase the markets – it will chase you out.

    3) I follow the a simple mechanism in my 401(k) – which has keep me out of trouble :
    a) Every 8-9% rise, I sell 5% of my position.
    b) Then, I xfer the funds to a bond or money market fund.
    c) If the price comes down by say 13% or more then I can choose to buy back the 5% I just sold. I do this once for every 3 sales.
    d) If the market keeps moving up at then at the next 8-9% rise, I sell 5% and so on.
    e) So, if the market keeps moving up and up, I am out of my position for a 450% profit ( 1.09 compounded 20 times) – and I am sitting on a comfortable cash investment.
    f) As the market keeps going up and up we are cashing out and moving towards the safer bond / money markets and thus reducing risk.

    It is pretty mechanical – but when done with discipline, it provides excellent returns and reduces risk.

    Think deeply, trade well.

  12. I as mentioned earlier, 20% correction from 9,500 levels is around 7,600 levels.

    The Dow made an intra-day low of 7,882.50. So, another 200-300 points and then the pain should be temporarily over. Perhaps, the markets might even hold temporarily at these levels.

    Gold keeps retreating from $920 levels. I am expecting a wild rally towards $1,040 range.
    The dollar so far has shown strength against other currencies.
    But it is like the leper with the most fingers.

    Think deeply, trade well.

  13. In post #2 above I reported that Washington Federal had indicated that they weren’t going to take advantage of the funds, due to the restrictions. Now it’s reported that they will, because they might be at a competitive disadvantage if they don’t.

    And since I wrote that post, any number of other uses have been thought of for the $800 billion.

    I try not to get political here (or elsewhere) for a lot of reasons, but does anyone else have the feeling that we just stocked the candy store, and we’re about to give one group of kids the keys?

  14. That’s not my concern as much as we’ve given the politicians an $800 billion fund that they seem to be doing what they want with. One new idea after another. I liked the original idea of just using $700 billion to do one thing a lot better.

  15. To continue the point of the first thread, Leno has had a few good ones lately.

    As Rodney Dangerfield:

    “Man the economy is rough. It’s so bad, Snopp Dogg has to get high on life.

    It’s so bad, A-Rod is dating Madonna for the senior discounts.”

  16. Now apparently some senators (esp. Feinstein) are requesting that the banks indicate how they are spending the money received. I saw the transition of this program from buying assets to investing money to be problematic, but I never envisioned this one. The politicians now want the banks to do the impossible or lie.

    The banks could pick X loans they made and claim that they were somehow dependent on having received the money. But that would be pure fiction. The banks have made a lot of loans since receiving funds, but I don’t think anyone could say how many loans they would have made if the funds hadn’t been received, or which loans were made because the funds were received.

    Congress modified the program as it was originally proposed, and it isn’t working as intended. Now members of Congress are working to find others to blame for their mistake.

  17. It wasn’t the banks that asked for this. Secretary Paulson proposed it, and then Congress screwed it up. And even though they screwed it up, banks thought that they’d be at a competitive disadvantage not taking advantage of it (see my comments about regarding Washington Federal).

    A lot of people have been calling this socialist or even communist. I don’t go that far, but the thing is government doesn’t run business well. Senator Feinstein proves that.

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