U.S. Government To Invest In Major Banks
MADELEINE BRAND, host:
From the studios of NPR West, this is Day to Day. I'm Madeleine Brand.
ALEX CHADWICK, host:
I'm Alex Chadwick. Coming up: Two years ago, when he predicted a global financial meltdown, he was scorned. Now, everyone wants to know what he thinks. Economist Nouriel Roubini shares some ideas, just ahead.
BRAND: First, though, another dramatic move by the government to intervene in the roiled financial markets. President Bush announced that the U.S. will spend up to $250 billion in taxpayer money to buy stocks in banks across the country. It's the first time the federal government has gotten involved in banking like this since the Great Depression.
NPR business reporter Frank Langfitt is covering this story. And Frank, I guess, are congratulations in order? We now own a piece of the American banking system, we taxpayers.
FRANK LANGFITT: We do, Madeleine, and congratulations to you. I hope it turns out to be a good investment.
BRAND: Why, thank you.
LANGFITT: You know, it was hard to imagine that we would be here even just a few weeks ago. In fact, Treasury Secretary Henry Paulson not so far back said, you know, he shot down this idea. He said it would be sort of signaling failure. But today, he reluctantly said, the country just doesn't have a choice. Here's how he put it.
Mr. HENRY PAULSON (Secretary of the Treasury): Government owning a stake in any private U.S. company is objectionable to most Americans, me included. Yet, the alternative of leaving businesses and consumers without access to financing is totally unacceptable.
BRAND: So, Frank, how exactly will this work? Who gets the money? And how will it work immediately to fix this financial crisis?
LANGFITT: Well, a lot of this money's going to go to top banks, banks Paulson called healthy, we suspect places like Bank of America and Citigroup. It will also go to smaller banks, even community banks.
What's going to happen is, the healthy banks are going to use this money to add to their reserves, so they can lend more. The weaker banks, they're going to use this to cover their losses during the financial crisis, so that they can actually start lending again. And into this system where - this credit system that's really frozen, the goal ultimately is to restore confidence.
BRAND: And so, what do we taxpayers get out of this, besides a piece of the American banking system?
LANGFITT: Well, you and me and everybody else, we get preferred stock in these companies. The stock will pay, I think, about a 5 percent dividend. And what's attractive about this, if the plan works, is we get some money out of it. This is not one of these no-strings-attached bailouts that I think really angered a lot of people. And when banks and the credit system recovers, hopefully, the government would be able to sell these shares back to the banks.
BRAND: Now, I know this goes against long-preached philosophies in this government about capitalism and the free markets, and a lot of people are saying the word socialism. So did anyone in the federal government address that today?
LANGFITT: He did very directly. He knows the criticisms are out there. He also emphasized that today's moves are temporary. And here's what he said.
President GEORGE W. BUSH: I know Americans are deeply concerned about the stress in our financial markets and the impact that it's having on their retirement accounts and 401's and college savings and other investments. I recognize that the action leaders are taking here in Washington and in European capitals can seem distant from those concerns, but these efforts are designed to directly benefit the American people by stabilizing our overall financial system and helping our economy recover.
LANGFITT: You know, one of things is, the situation, the economy is so worrisome now that ideology has become a bit of a luxury. There's one other thing I'd like to point out about this plan that won't get a lot of attention today but is really important. The government is guaranteeing lending between banks and right now, banks really don't trust each other. And what's important is, the government is saying, you know, we're going to cover these loans if the bank can't pay them back. And that may really help do a lot to fix this credit crisis.
BRAND: NPR's Frank Langfitt. Thank you.
LANGFITT: You're very welcome, Madeleine.
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