By Mark Huffman
ConsumerAffairs.com
October 14, 2008
When Congress debated the controversial $700 billion "bailout plan,"
the objective was for the government to buy up unmarketable debt
securities, thereby establishing a market value for them, and
returning liquidity to the marketplace.
Not a word was mentioned about Uncle Sam buying stock in major banks. But in response to actions in Europe, Treasury Secretary Hank Paulson told banking leaders Monday that the government will use $350 billion of the bailout package to purchase preferred stock in their institutions. Oh, and it's an offer they can't refuse.
The objective, administration sources say, is to quickly pump the emergency money into the U.S. financial system. Events are moving too quickly, they say, to wait on setting up the cumbersome system for analyzing and buying bank's bad debt.
The U.S. government will reportedly purchase stock in banks that so far have not been identified as "troubled." They include JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup.
Presumably, the banks will use the money from the sale of their stock to make loans to businesses, to prevent the credit market from seizing up. When European governments announced a similar plan Monday, world stock markets roared their approval. In New York, the Dow Jones Industrial Average posted a one-day record, closing up nearly 1,000 points.
Administration officials say the first $350 billion of the $700 billion bailout package will be spent before the end of this year, and will all go for bank stock, which can be resold later, hopefully at a profit. The remaining $350 billion will be spent by the new president, who will take office in January.
