Paulson OKs Bank Stock Purchase Plan
MELISSA BLOCK, host:
From NPR News this is All Things Considered, I'm Melissa Block.
ROBERT SIEGEL, host:
And I'm Robert Siegel. Treasury Secretary Henry Paulson announced late today that the government will be using yet another tool in its tool box to stem the economic crisis.
Mr. HENRY PAULSON (Treasury Secretary): I briefed my colleagues on the work we are pursuing to implement swiftly and thoughtfully the new financial rescue package. We are developing strategies to use the authority to purchase and ensure mortgage assets into purchase equity in financial institutions as the necessary to promote financial market stability. As we develop plans to purchase equity, as in the approach we are taking to broad mortgage asset purchases, we are working to develop a standardized program that is open to a broad array of financial institutions. Such a program will be designed to encourage the raising of new private equity, capital to complement public capital. Consistent with the legislation, any equity the government purchases to a broadly available equity program will be on a non-voting basis except with respect to market standard terms to protect our rights as investors.
SIEGEL: Henry Paulson spoke after meeting today with G-7 finance ministers and Central Bank governors. For more on the Treasury plan, I'm joined by NPR's John Ydstie and John, we're focusing really here on - is the phrase to purchase equity in financial institutions. What do you understand that plan to be?
JOHN YDSTIE: Mm hmm. Well, what you just heard Secretary Paulson say is about all the detail that we have.
SIEGEL: Well, you know, right?
YDSTIE: He's made passing references to this before so it's not the first time and there have been leaks that have suggested that some things that the government is going to do but it appears that they're going to create a standardized program. They are going to hope that they don't drive out private capital which would suggest they're simply going to buy shares as opposed to go in and cram down current shareholders. It appears that they are not going to take positions on the board and they'll be very passive in terms of the management of that company.
SIEGEL: I'd like you just to explain the idea here and the theory behind doing this. Why does the government believe and why do some commentators of these believe that by taking an equity stake in the banks. That's owning banks stock. Why would that make a difference as opposed to going after the supposedly toxic securities those banks hold.
YDSTIE: Well, it's much more efficient way to do it. By injecting money directly into the banks, you end up giving the banks more capital. And for every dollar, or let's say for every $10 that - for every dollar that the U.S. government invests in a bank, it can go out and lend $10. And that should jump start lending. With - if there going to be mopping up in the other part of the plan, which is to mop up these toxic assets, they have to go in and buy the assets first and take them out. And whatever the bank might make as a profit in there, they could began to lend on but you have to spend much more money to mop up assets and get the same bang in terms of lending as you would by buying stock.
SIEGEL: How close is this to nationalizing the banks?
YDSTIE: Well, I don't think it's nationalizing the banks. Again, it looks like the government is planning to take a very passive stake in banks, they'll buy the equity. They have said they don't plan to be on the boards of these banks. And there's no mention that they're going to be removing management. So they'll be an equity holder like all the rest of private equity holders and not be - you know, taking control of banks.
SIEGEL: On the other hand, this is something quite new for the federal government to be doing. We have to go back to Andrew Jackson, I think to be talking about a bigger federal role in banking.
YDSTIE: I think you're right. This is a real change in federal government policy.
SIEGEL: The G-7 ministers met today, what else came out of the meeting?
YDSTIE: Well, they issued a five-point plan, not identical policies that they're going to be using but identical frameworks that they're going to work through. And they basically said they're going to take all measures necessary to make sure they get a handle on this financial crisis.
SIEGEL: That's NPR's John Ydstie talking with this about Treasury Secretary Paulson's announcement today that the Treasury is working on a plan to take an equity position in financial institutions. John thanks a lot.
YDSTIE: You're welcome, Robert. Transcript provided by NPR, Copyright NPR.
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