TEXT OF INTERVIEW
TARP is the Troubled Asset Relief Program, one of the names for the original bailout package. The package has changed a bit since the president signed it. As we told you Friday it's now going to have the government taking a stake in some of the banks it helps out. The CEOs of some of those banks made a trip down to Washington today for a tete-a-tete at the White House. In theory to work out the details.
Economist Robert Litan's a senior fellow at the Brookings Institution.
Mr. Litan welcome to the program.
Robert Litan: Hi.
Ryssdal: Imagine you're a fly on the wall at that meeting this afternoon at the White House with Secretary Paulson and these big bankers. Is there a chance they're going to look at him either one on one, or in the conference room and say, Hank what took you so long?
Litan: Yeah, they could say that. It will probably be a candid conversation about what else Treasury ought to be doing. There will probably be questions about the recapitalization, details that were not provided by Assistant Secretary Kashkari today. Perhaps outlook for the general economy, and so on.
Ryssdal: What's your guess as to the details of that recapitalization plan? How is that going to work?
Litan: Well, we're still all somewhat in the dark. I'm reasonably certain we know that it's going to be voluntary. We don't know whether the stock is going to be voting or non-voting, that the Treasury is going to purchase, which is a big philosophical issue. Over in Europe, the bailout there is having the government take voting positions and in fact, controlling positions in the banks. I don't think we'll do that here in the United States, or at least I hope not. Then there will be the issue of price.
Ryssdal: So, price once again is a problem. Either it's the stock price at which we would recapitalize these banks, or it's the price of the troubled assets that we would take as a part of the original bail out.
Litan: Price is always a big deal. It's going to be easier to do a price, I think, on the recapitalization if you pick a date. Because at least there is a market price for the publicly traded stocks. It's much more difficult of course to determine price for the troubled assets. You can do an auction for, if perhaps some of them, but I suspect you're going to have to do a lot of one on one negotiations for the assets.
Ryssdal: Play out for me a moment, the issue of whether or not we should have a voting share in these banks. Taxpayers will say listen, we're paying good money, we want a say in how these banks will run, because clearly they weren't doing such a good job before.
Litan: Well, that's certainly a good argument to have a voting position. On the other hand, I think it's somewhat awkward in what remains of our capitalist system to have the government be running a good portion of the banking system--or even a significant minority of the banking system. The government is not a banker.
Ryssdal: Is this now, finally going to work? Why is recapitalization better than the original bailout?
Litan: Well, if it's done in a formulaic way, where the price is sort of a formula. Namely the price on a particular day. I think the recap can go much more quickly than the asset sales. And since the core problem here is the banks don't trust each other, they don'tt know if their counterparty is going to be solvent the next day. It's imperative that Treasury get in there in some way, and assure the banks that the other banks they're dealing with are still going to be around. And if you can do the recap more quickly than the asset purchase, then by all means do it.
Ryssdal: Obviously nothing is without risk at this level of finance. Do you worry about a private investor staying away now that the government is in there?
Litan: It's true that for any individual bank when the government makes a purchase it dilutes the ownership rights of the existing shareholders. But on the other hand, for shareholders as a whole, for all banks, if they know that the government is not going to let a bunch of them go down, that seems to me to be a confidence-enhancing move, which should actually strengthen bank capital sharers as a group.
Ryssdal: Robert Litan is a senior fellow at the Brookings Institution in economics. Mr. Litan thanks a lot for your time.
Litan: Thank you so much.