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Can taxpayers bank on the new plan?

Ashley Milne-Tyte Oct 14, 2008
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Can taxpayers bank on the new plan?

Ashley Milne-Tyte Oct 14, 2008
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TEXT OF INTERVIEW

Bill Radke: U.S. Treasury Secretary Henry Paulson says the idea of government owning a stake in a private company — well, he finds it objectionable. And yet, the alternative is worse:

Henry Paulson: Without confidence that their most basic financial needs will be met, Americans lose confidence in their economy, and this is unacceptable.

This morning, Paulson outlined the much-anticipated plan to spend $250 billion to take an equity stake in nine of America’s financial giants. The preferred stock will pay the government a 5 percent dividend that goes up to 9 percent after five years.

Fed chairman Ben Bernanke described step two:

Ben Bernanke: The guarantee of senior debt of all FDIC depository institutions and their holding companies will restore the confidence of these institutions’ creditors and reinvigorate the crucial inter-bank lending markets.

Oh, and the Fed will be the buyer of last resort for commercial paper. So the U.S. taxpayer is in the banking business. Marketplace’s Ashley Milne-Tyte is in New York following your investment.

Ashley Milne-Tyte: The idea is that the U.S. taxpayer eventually gets their money back.

Kevin Logan is senior market economist at Dresdner Kleinwort. He says the Treasury has no desire to be a long-term investor in banks:

Kevin Logan: And if in a year or two — or perhaps three — if the banks find that they’re profitable again, then they could pay back the Treasury by buying back the preferred shares.

Logan says there’s always a chance the plan might fail. He says everyone hopes banks will start reaping profits again before long. Still, there’s a chance those mortgage-backed securities could produce massive losses. Even so, Logan says the plan’s worth implementing in order to stabilize the whole financial system.

In New York, I’m Ashley Milne-Tyte for Marketplace.

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