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Scott Jagow: Congratulations: You’re about to be the proud owner of some bank stock. This morning, the president and the Treasury Secretary outlined the new plan for some of that $700 billion. It is to invest $250 billion directly into the banks and buy up their stock. Paulson says he reluctantly embraced the idea:
Henry Paulson: Government owning a stake in any private U.S. company is objectionable to most Americans — me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.
As for the details: about half the money will go into big banks, about half the money into small banks. The FDIC will insure most new debt issued by the banks and expand its banking insurance.
Let’s get a couple different perspectives on this new plan. We’ll begin with economist Gary Schilling. Gary, what do you think?
Gary Schilling: It depends on how you look at it. If you look at it strictly as an investment, it’s highly risky. Hey, notice that the U.S. is not getting as good a deal as Warren Buffett — he got a 10 percent dividend yield from Goldman Sachs preferred stocks, U.S. government only gets 5 percent. Now from an overall standpoint, though, you can say if this is what it takes to preserve the financial system then it’s really cheap. But again, it goes back to this idea of the international competition of this thing. It isn’t something that Paulson by nature would introduce. I think it’s more than anything being forced to be competitive globally.
Jagow: So you’re saying that the U.S. government is being peer pressured?
Schilling: Absolutely. Peer pressured by the likes of the U.K., Germany, France, Italy, you run throughout Europe.
Jagow: Well, if not this, what else can be done?
Schilling: Ahh, that’s the $64 trillion question. And to me, the big problem with this is neither the policy makers in Washington nor the financial institutional leaders nor investors have approached this whole situation as anything but an ad-hock, crisis by crisis affair. And I think this latest maneuver is symptomatic of this.
Jagow: All right Gary, thanks for joining us.
Schilling: OK. Interesting times!
Jagow: It certainly is. All right, not a big fan of the new plan. Now let’s bring in our economics correspondent, Chris Farrell. Chris, your take on taxpayers investing in banks?
Chris Farrell: Oh, I think it’s a great idea. I had to stop for a moment — I just never would have imagined that the U.S. government would be spending $250 billion buying big chunks of Citigroup, Bank of America, Wells Fargo, Goldman Sachs. So you have to take that pause. But what you’re seeing is the moment when we say goodbye to the depression and hello to the recession. I think that what is happening here in the U.S., mirrored, in Europe, basically we are truly having a coordinated effort by the central bankers and by governments to stem the panic, stem the credit crunch, break the logjam, whatever metaphor you want to use. This nationalization’s the key part of it, it’s happening here, it’s happening in Europe, and I think that it will bring, you know, the jargon term we’re all starting to become comfortable with, liquidity to the market.
Jagow: But as we just heard, there has been a lot of peer pressure here from Europe. How do we know that this is the way to go? Because it sounds pretty risky taking on bank stocks that — who knows how much more value these banks might lose.
Farrell: That’s right. I mean, the equity stake could disappear. But peer pressure is a good way to put it. We live in a global economy, and to a large extent, Scott, we have a global solution that’s evolving — and it’s not just buying, the U.S. government buying preferred stock. There are two other factors here: guarantee all senior debt issued by banks over the next three years. I mean, think about that. And then the other thing is unlimited, unlimited FDIC insurance for non-interest baring accounts — which is essentially saying to small business here in the United States: Small business, you’re OK. But this is going to grab people’s attention, it’s going to I think bring some confidence back into the market and I wouldn’t be the least bit surprised we’re going to see investors cheering this move.
Jagow: All right, the positive take there. Chris Farrell, our economics correspondent. Thanks.
Farrell: Thanks a lot, Scott.
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