Listener Question: Will The Government Sell the Stocks?

Geoffrey Sledge asks:

Now that the U.S. government is buying massive amounts of equity in banks, can and will they ever sell it off? I'm less worried about creeping socialism than just hoping that my government bases its finances on something more stable than the value of banks that have proven unreliable. If down the line the government decides to cash out on the equity, wouldn't that unbalance the market and send the price of that stock into a freefall? Bill Gates can't suddenly sell all his Microsoft stock.

In other words, is the U.S. government going to be a stockholder in these banks for permanent?

This is a great question with — lucky for me — an easy answer:

Yes. The government will sell the stock in banks as soon as possible.

As Brad Setser told us, governments buying stock in troubled banks is standard for banking crises. It's just that the U.S. hasn't had one in a long time, so we're not used to it.

The standard recipe is to hold the stock as long as needed and no longer. It's hard for me to picture any scenario in which the U.S. government holds on to the stock for too long.

Also, the government isn't calling up their broker and buying regular, common stock in banks. They are crafting special preferred shares, designed to allow the government to get out relatively easily when the crisis passes. Basically, the shares are designed to encourage (force?) the banks to try to buy back all the shares within the next three years or face big penalties. That way, the government hopes, there won't be a sudden dumping of bank shares on the market all at once.

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