Monday, October 13, 2008

US Government to be $250 billion owners of financial organizations: Troubled banks have no choice but to accept nationalization

Did you think you'd ever see this? I didn't. I am not going to call this socialism, because that kind of rhetoric is not indicative of what this plan is or what is motivating the officials behind this plan. But the move certainly is at the very least the partial nationalization of our largest banks.

It is nationalization to save capitalism.

My question is, what future structural adjustments to our economy does this move and other recent moves like it make more possible? Now that it is more acceptable to use the government to make capitalism better, what kind of government actions will become harder to argue against? Universal health care? Government-run child care? Guaranteed personal incomes?

From the NY Times report:

The Treasury Department, in its boldest move yet, is expected to announce a plan Tuesday to invest up to $250 billion in large and small banks, according to officials. The United States is also expected to guarantee new debt issued by banks for a period of three years, officials said.

And the Federal Deposit Insurance Corporation will offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees.

Treasury Secretary Henry M. Paulson Jr. outlined the plan on Monday to nine of the nation’s leading bankers at an afternoon meeting, officials said, in which he essentially told the participants that they would have to accept government investment for the good of the American financial system. This capital injection plan will use a huge chunk of the money authorized for Troubled Assets Relief Program.

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.

The goal is to inject massive liquidity into the banking system. The government will purchase perpectual preferred shares in all the largest U.S. banking companies. The shares will not be dilutive to current shareholders, a concern to banking chie executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.

The capital injections are not voluntary, with Mr. Paulson making it clear this was a one-time offer that everyone at the meeting should accept. The government is not planning to inject capital in foreign banks, and Paulson did not discuss if he would do so for smaller regional banks like National City.

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