Treasury Department Grapples With Options
MELISSA BLOCK, host:
As we mentioned, the U.S. treasury, still trying to find something that will restore confidence in the markets, appears ready to pull out yet another tool from its so-called toolbox. It says it could buy stakes in U.S. banks. British authorities announced a similar plan for that country's banks yesterday. NPR's John Ydstie reports.
JOHN YDSTIE: What appears to be a new emphasis in Treasury's approach to the financial crisis was signaled in a statement from Treasury Secretary Henry Paulson yesterday. Paulson mentioned the power to inject capital into financial institutions at the top of a list of authorities given to the Treasury in the emergency bill that passed Congress last week. Simon Johnson, the IMF's former chief economist and a critic of the original Paulson plan, welcomed the Treasury's change in emphasis.
Professor SIMON JOHNSON (Senior Fellow, Peterson Institute for International Economics; Former Chief Economist, IMF): Treasury is learning very fast. This is what larger falls in the stock market will do that they say will concentrate your mind. And they're pretty concentrated right now.
YDSTIE: Johnson says the huge selloff in world stock markets since the rescue bill was passed last week is partly a signal that the markets didn't have a lot of confidence in the core of the Paulson plan that the Treasury would use $700 billion to buy up distressed mortgage-related securities from financial institutions. Through buying those assets from banks, Treasury would have been providing them with capital to stabilize them. Simon Johnson and others criticized that plan as being too indirect and leaving taxpayers holding potentially bad assets. He says the new approach, buying shares in banks, is better for taxpayers.
Professor JOHNSON: The basic deal structure is the same deal that Warren Buffett gets when he goes in to save companies. I think, that you can sell to the American people. You say the taxpayer's going to get Warren Buffett type deals. That sounds good to me.
YDSTIE: But the authority to buy shares in financial institutions was not a power the Treasury had asked for in the initial version of the Paulson plan. It was something added to the bill by the Congress. Analysts who have tracked the progress of the bill, including prominent economist Nouriel Roubini, say the text of the bill is actually somewhat fuzzy on the authority. But they point to this colloquy between Virginia Republican James Moran and House Financial Services Chairman Barney Frank of Massachusetts as an attempt to clarify congressional intent. First Moran.
Representative JAMES MORAN (Republican, Virginia): And I do want to clarify that the intent of this legislation is to authorize the Treasury Department to strengthen credit markets by infusing capital into weak institutions in two ways, by buying their stock, debt, or other capital instruments and, two, by purchasing bad assets from the institutions.
Representative BARNEY FRANK (Democrat, Massachusetts): I can affirm that. As the gentleman knows, the Treasury Department is in agreement with this. And we should be clear, this is one of the things that this House added to the bill - and the Senate - the authority to buy equity. It is not simply buying up the assets. It's to buy equity and to buy equity the way that the federal government will be able to benefit if there is an appreciation.
YDSTIE: In an interview with NPR today, David McCormick, Under Secretary of the Treasury for International Affairs, said the Treasury is looking closely at injecting capital into financial institutions.
Dr. DAVID MCCORMICK (Under Secretary for International Affairs, Treasury Department): It is very important that we think about these programs in a way that will be - particularly if they're volunteer programs - in a way that will be attractive to financial institutions. And that's true whether it's asset repurchase or whether it's some sort of capital injections.
YDSTIE: But a banking industry source says having the Treasury buy shares in banks is not something the industry wants or needs. The source says it could discourage private investors from buying the shares of financial companies out of worries that their shares could be diluted if the Treasury comes in. The source said if the government wishes to inject capital into banks, it could do so through the FDIC in a process like the one used in Citigroup's recent offer to purchase Wachovia. John Ydstie, NPR News, Washington.
Correction Oct. 9, 2008
In some versions of this story, we misidentified Virginia Congressman James Moran as a Republican. He is a Democrat.