The U.S. government is officially switching gears. In news that almost all the papers banner across the front page, the Treasury Department will be announcing that the U.S. government plans to invest up to $250 billion in the nation’s banks in a move that will effectively translate into a partial nationalization of the financial institutions that take federal money. In addition, the government would provide insurance on all deposits in noninterest-bearing accounts and insure certain types of bank debt. The New York Timescalls it the Treasury Department’s “boldest move yet” to deal with the financial crisis. The Wall Street Journal does the best job of summarizing that the move “intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.” USA Todaypoints out that Europe’s moves to prop up banks across the pond “set the pattern for the U.S. plan” because if the Bush administration failed to act “in a similar fashion, investors might have moved money abroad to seek safety.”
The move represents a dramatic shift for Treasury Secretary Henry Paulson, who had previously opposed the idea of taking equity stakes in banks. The Los Angeles Timesspecifies that while the government still plans to go ahead with its plan to buy toxic securities, “the new strategy is likely to move that into a secondary position.” The new program will be divided into two parts. First, the government will devote $125 billion to buy a minority stake in nine of the nation’s top financial institutions and then make the other $125 billion available to thousands of banks and thrifts across the country. Executives from the nine big banks met with Paulson yesterday and while some weren’t happy with the plan, they all agreed to participate. The Washington Postsays Paulson told the executives they needed to agree to it for the good of the American economy, illustrating that while “officially the program was voluntary, the banks had little choice in the matter.”
By pretty much forcing the nine big financial institutions to take government money, officials wanted to make sure there would be no stigma associated with receiving the funds, which would have made the entire plan useless. The WSJ and USAT have the full list of the nine banks that will now be partially owned by taxpayers: Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, Merrill Lynch, Citigroup, Wells Fargo, Bank of New York Mellon, and State Street.
The amount of money each bank will get won’t be uniform—the WSJ has the specific numbers—but essentially the Treasury will buy up to $25 billion in preferred stock in each of the financial institutions. The stock each bank issues “will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years,” the NYT details. The government also added a provision that would allow taxpayers to benefit if the stock value of the financial institutions increases.
The NYT notes that while financial institutions that accept government money won’t be required to eliminate dividends or fire their chief executives, they will “be held to strict restrictions on compensation.” But the WSJ isn’t impressed and notes that the restrictions “are relatively weak compared with what congressional Democrats had wanted.” Key Democratic lawmakers emphasized yesterday that they fully expect the government to impose strict limits on compensation, signaling that a failure to do so could put in doubt whether Congress releases more of the $700 billion after Treasury officials burn through the first installment.
The LAT says that some in the banking industry “reacted with alarm” when details of the plan began appearing in news reports and they predicted the government would soon hear from hundreds of angry banks that were left out of the first phase of the program. “This worked in Sweden, where you have about 14 banks,” one “industry insider” said, adding that it’s little surprise that Paulson, a Wall Street insider, would choose to pump up big New York financial institutions first. “It’s like picking your kids,” he said. The WP notes that there is a risk the banks will use the government money “to bolster their balance sheets” instead of increasing lending, but regulators will apparently pressure the financial institutions not to let that happen.
One key question that the WSJ and WP highlight: What took so long? The WSJ points out that executives at some of the leading banks “pitched such a plan at various points earlier this summer” but they were summarily rebuffed by government officials who were convinced that purchasing toxic assets was the way to go. The WP points out that Rep. Spencher Bachus, R-Ala., was one of the first lawmakers to propose a similar idea last month at a Capitol Hill meeting. Several key Democrats expressed support, but Treasury officials weren’t having any of it. “I do believe they had this one plan, and they were saying ‘This is it,’ ” Bachus said.
If there’s a clear winner in all this, it’s the British government. Of course, that could all change if the rescue plans that are taking shape around the world fail. But as of now, Prime Minister Gordon Brown went, in a matter of days, from lame duck to global leader as the plan he announced last week to inject billions into British banks was quickly taken up by European leaders and now the United States. “He’s the cat who got the cream,” a British historian tells the WP. “It was a gift from heaven for him to have this crisis in his field of expertise.”
For their part, investors are cheering. News that European leaders were planning to prop up banks, coupled with anticipation for a new U.S. program, sent stock prices soaring yesterday. The Dow Jones industrial average ended more than 900 points higher, the largest point gain in history, for an 11 percent gain, the biggest since 1933. As the WSJ highlights in its front page, history has shown that these quick gains can be short-lived, which is why no one was ready to say that yesterday marked a turning point in the ongoing crisis.
Speaking of history, the NYT notes that while the new program marks “an exceptional step” it is not “an unprecedented one.” Yes, it’s true that it would mark the biggest intervention in the markets since the Great Depression, but the government has often inserted itself in the economy during times of great need. And just like in the past, many think the government will quickly get out of the way when conditions stabilize. While U.S. culture values free-market capitalism above all, “Ideology is a luxury good in times of crisis,” as one historian puts it.
Meanwhile, the presidential candidates want voters to know they take their economic concerns seriously. Yesterday, Barack Obama unveiled a new set of expensive proposals to deal with the financial crisis. Among other things, Obama’s new plan would give a tax credit for employers that create new jobs, create a 90-day foreclosure moratorium for homeowners who are making an effort to keep up with payments, and eliminate income taxes on unemployment benefits. The price tag of Obama’s stimulus plan now stands at $175 billion, including the $60 billion that the moves outlined yesterday would cost. Obama’s met with congressional leaders to discuss the proposal, and there are hints that Congress might consider a new stimulus package right after the election, but no one is ready to commit to anything since President Bush could easily veto it.
After some confusing statements from John McCain’s campaign about whether the Republican would offer new proposals for the economy, aides yesterday said that McCain would outline them today but gave no hint as to what they might be. In the meantime, the LAT fronts a look at how McCain unveiled “a feisty new campaign speech” yesterday that did little to convince Republicans their candidate is moving in the right direction. Republicans disagree on what McCain needs to do to change things around as some urge him to be more aggressive in questioning Obama’s character while others think he should focus on the economy. Yesterday, McCain largely avoided raising the character questions that have dominated his campaign lately and mostly focused on his promise to change Washington.
The NYT goes inside with a report by a Czech research institute that says Milan Kundera, one of the most famous Eastern European writers, told police about a spy when he was a young man. According to the report, 21-year-old Kundera informed local police about a guest in a student dorm. The man was promptly arrested and sentenced to 22 years in prison. The usually reclusive Kundera immediately denied the claims and called them “pure lies.”
After eight years under Bush’s leadership, the Republican Party “is a mess and a fraud,” writes the WP’s Eugene Robinson. While Robinson disagrees with the Republican economic philosophy, he still respects “its integrity,” which is something this administration can’t say since it went against so many of its own stated ideals in the past few years. Now, it isn’t clear what the Republican Party wants to achieve besides power. “When a political party reaches the point of lurching incoherence, the most effective cure is a good, long spell in the wilderness.”