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The Treasury Department has been watching those improving credit markets and trying to adapt its $700-billion rescue plan accordingly.
The original idea, to buy bad assets from banks, has largely been set aside.
Instead, Secretary Paulson’s looking at doing more of Plan B: Buy stock in financial companies beyond banks. That is a quicker way to get capital into the financial system. Although, our Washington Bureau Chief John Dimsdale reports, not everybody thinks it’s necessarily the best idea.
So far, the Treasury Department has bought $163 billion worth of equity in 35 banks and insurance companies. The cash infusion has improved the flow of credit. So now, Treasury is considering more capital injections in a broader category of private companies including car financing firms, like GMAC or Ford Motor Credit. Scott Talbott at the bank lobbying group the Financial Services Roundtable likes that idea.
Scott Talbott: They have a direct lending relationship with the consumer. If you pick out your car and then go next door to the finance department and those credit departments are unable or unwilling to lend to you, you can’t buy the car. So that shuts down the process.
But critics say there aren’t enough restrictions on how banks use taxpayers’ investments. Plus, existing shareholders complain that when the government buys a stake in private companies, their shares lose value. And they have to stand in line behind the government to claim assets when things go wrong. The Cato Institute’s Jagadeesh Gokhale says the Treasury Department’s changing strategy is self-defeating.
Jagadeesh Gokhale: Markets hate uncertainty. And so, the knee jerk type of policy initiatives the current Treasury Secretary and his team have undertaken have actually exacerbated that uncertainty, and so I’m quite skeptical.
Treasury still has more than $80 billion left to spend before asking Congress for more. Hundreds of banks are still in line for help. And chances are, the next administration will be making changes of its own.
In Washington, I’m John Dimsdale for Marketplace.
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