Fine Print: A 'Back-Door' Bailout?

Filed under: Understanding The Crisis

NPR's Chris Arnold sends this, which he titles "A back door in the plan for an alternative bailout approach: Lawmakers leave room for a simpler way to prop up banks."

That simpler way is known as "stock injection." Arnold writes:

Treasury Secretary Paulson seems convinced that the best way to solve the immediate financial crisis is to buy up hundreds of billions of dollars worth of bad debt on the books of financial firms. Others disagree. They ask, why not just give cash to the banks to prop them up without buying their toxic mortgage-related securities?

Some say, given capital requirements for banks, you get $12 dollars in debt assistance for every $1 of cash you directly pump into a bank. So why not just do that? And take stock in return so the government gets paid back? Basically, they say the government should do what Warren Buffet did when he invested in Goldman Sachs. Give them some cash, take some stock. This is along the lines of what Sweden did to prop up its banks during a banking and real estate crisis in the early 1990's.

This is not the approach Paulson has been pushing for. But it's becoming clear that the legislation left room for this approach to be applied in some cases as the Treasury Secretary sees fit. Which leaves the door open down the road, if Paulson has a change of heart, or if the nation has a different Treasury Secretary.

Adam Davidson says he got a tip about this, too. I'm looking for specific language in the bill (for download). Adam says he's been told the relevant sections are 106, 107 and 113.

UPDATE: Is this it?

From Section 113:

IN GENERAL.The Secretary may not purchase, or make any commitment to purchase, any troubled asset under the authority of this Act, unless the Secretary receives from the financial institution from which such assets are to be purchased

1. in the case of a financial institution, the securities of which are traded on a national securities exchange, a warrant giving the right to the Secretary to receive nonvoting common stock or preferred stock in such financial institution, or voting stock with respect to which, the Secretary agrees not to exercise voting power, as the Secretary determines appropriate; or

2.in the case of any financial institution other than one described in subparagraph (A), a warrant for common or preferred stock, or a senior debt instrument from such financial institution, as described in paragraph (2)(C).

Laura Conaway

2:22 PM ET | 10- 3-2008 | permalink

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