'Back-Door' Bailout? (Stock Injection instead of buying distressed assets)

[David Farber <dave () farber net>]

Begin forwarded message:

From: Robert J Berger <rberger () ibd com>
Date: October 4, 2008 5:54:28 PM EDT
To: David Farber <dave () farber net>, Dewayne Hendricks <dewayne () warpspeed com 
>
Subject: 'Back-Door' Bailout?  (Stock Injection instead of buying  
distressed assets)

[First heard about this on today's broadcast of "365: Another  
Frightening Show About the Economy" NPR's "This American Life" (http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365 
)

It looks like there is language in the passed bailout bill that would  
allow for stock injection where the US taxpayers would have an equity  
stake in the banks, not just end up holding the bag of bad debt. But  
we will need to force Paulson (or the next Treasury Secretary) to use  
it --Rob]

Fine Print: A 'Back-Door' Bailout?
http://www.npr.org/blogs/money/2008/10/fine_print_a_backdoor_bailout.html

NPR's Chris Arnold sends this, which he titles "A back door in the  
plan for an alternative bailout approach:  Lawmakers leave room for a  
simpler way to prop up banks."

That simpler way is known as "stock injection." Arnold writes:

Treasury Secretary Paulson seems convinced that the best way to solve  
the immediate financial crisis is to buy up hundreds of billions of  
dollars worth of bad debt on the books of financial firms. Others  
disagree. They ask, why not just give cash to the banks to prop them  
up without buying their toxic mortgage-related securities?

Some say, given capital requirements for banks, you get $12 dollars in  
debt assistance for every $1 of cash you directly pump into a bank. So  
why not just do that? And take stock in return so the government gets  
paid back? Basically, they say the government should do what Warren  
Buffet did when he invested in Goldman Sachs. Give them some cash,  
take some stock. This is along the lines of what Sweden did to prop up  
its banks during a banking and real estate crisis in the early 1990's.

This is not the approach Paulson has been pushing for. But it's  
becoming clear that the legislation left room for this approach to be  
applied in some cases as the Treasury Secretary sees fit. Which leaves  
the door open down the road, if Paulson has a change of heart, or if  
the nation has a different Treasury Secretary.

Adam Davidson says he got a tip about this, too. I'm looking for  
specific language in the bill (for download). Adam says he's been told  
the relevant sections are 106, 107 and 113.

<snip>




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