Amid Bailout, Stake For Uncle Sam Sought In Firms
MELISSA BLOCK, Host:
This is All Things Considered from NPR News. I'm Melissa Block.
MICHELE NORRIS, Host:
And I'm Michele Norris. As the Wall Street bailout package takes shape, the details are becoming clear as far as how the government might take partial ownership of financial companies. The idea is if the government bought troubled assets from a bank, in return it would get warrants, which are basically stock options. That way the Treasury could get back billions of dollars by selling that stock after the crisis is over, and that strategy has worked for bailouts elsewhere in the world. NPR's Chris Arnold explains.
CHRIS ARNOLD: If you think things are bad in the U.S. financial markets, just be glad we're not Sweden. In the early 1990s, Sweden had a total meltdown in its banking system. The country's real estate market plunged 50 to 60 percent in about a year. There were massive layoffs, unemployment quadrupled to 12 percent, the banks were crippled. Matt Slaughter is a professor at Dartmouth's Tuck School of Business.
MATT SLAUGHTER: They, like we, the essence of their problem was over-inflated home prices that then started crashing down and created stress on a lot of banks and other financial firms.
ARNOLD: Sound familiar? The difference, Slaughter says, is that the U.S. is intervening much sooner in our meltdown before it spreads to cause a really severe recession. Now, when the Swedish government propped up financial firms, it took a chunk of their stock, and that saved taxpayers there a lot of money. The U.S. government may have learned something from that. Slaughter is glad that a similar measure is now being written into the emerging drafts of the legislation.
SLAUGHTER: The devil will be in the details, but the general principle of having equity stakes accrued to the government for taking on the risk of buying these bad debt securities makes great sense.
ARNOLD: That's exactly what New York Senator Charles Schumer was getting at this week when he questioned Fed Chairman Ben Bernanke. Schumer asked him about Warren Buffett's investment in Goldman Sachs.
CHARLES SCHUMER: Warren Buffett got an equity share in Goldman Sachs, and it didn't stop Goldman Sachs from making the deal with Warren Buffett. It seems only fair that we reward taxpayers if, as we hope, this plan succeeds.
ARNOLD: When Treasury Secretary Paulson made an emergency loan to the big insurance company, AIG, he actually took an aggressive, even punitive amount of equity. The Treasury fired the CEO and got the right to take 79 percent of the entire company. One board member reportedly said he felt violated. But when the Bush administration put together the initial draft of this $700 billion bailout, there was no provision even for taking much more modest amounts of stock.
RICHARD MARSTON: I think the reason why they didn't do it is because they felt that some banks would decide not to participate in the auction.
ARNOLD: Richard Marston is a finance professor at the Wharton School. He says Paulson wants to jumpstart the frozen market for mortgage-related securities, so he didn't want to create obstacles that might prevent banks and other firms from selling off their troubled assets.
MARSTON: Some of the banks don't want to give up equity positions. I think they wanted to make it as inclusive as possible. But I think the arguments in favor of it overwhelm those considerations.
ARNOLD: Marston says for one, many American taxpayers are understandably outraged at having to bail out the Wall Street firms that earned eye-popping profits while creating this mess in the first place, 700 billion is around $10,000 per American family. So, he says, the U.S. Treasury should get back all it can. But also, he says, you don't want to encourage more reckless behavior by bailing out the companies for free.
MARSTON: That creates a lot of moral hazard and something that we have to worry about as a nation going forward. In fact, the whole financial world has to worry about it.
ARNOLD: So, Marston says the government should take a pound of flesh here. Just how much of an ownership stake the government takes, and how, is still being hammered out. Matt Slaughter says that the government should keep this simple. The more complicated it gets, the bigger the risk of confusing the market. He says the bottom line is the government's taking a risk here, so it should get a chunk of stock upfront and give the taxpayers the best chance to get paid back. Chris Arnold, NPR News.