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. The markets react after the world's central banks work together to lower interest rates. They're happier in Europe, the U.S. not quite clear. Meanwhile, struggling insurance giant AIG wants even more bailout money. More on that coming up.
BRAND: First, the Treasury Department is considering investing billions of dollars in troubled banks to try to get them lending again. The move, which at this moment is just an option, is permitted under a little noticed provision in that Wall Street bailout package passed by Congress last week. We're here with NPR's business reporter Frank Langfitt, and, Frank, what would happen if the government did decide to go ahead with this and buy up stakes in banks?
FRANK LANGFITT: Well, the Treasury Department would put billions of dollars in these banks, and the idea is to build up the reserves. You know, in theory, the banks, they need more capital. Once they get more of it, they can begin to loan to each other again. And the idea is, right now, they need to build up trust in the credit markets and begin to unclog them. You know, the focus, we all focus on the Dow, as Alex just mentioned, but the credit markets really are the biggest threat right now to the U.S. economy.
BRAND: So what does this mean? Does this mean that the government would nationalize banks?
LANGFITT: Well, if it went in that way, it would feel a bit like nationalization, certainly, but right now, this is still just a plan B. Plan A is still what was in that bailout bill, the main part of it, which was buying up these toxic securities, these mortgage-backed securities.
BRAND: OK, let's say the government does go ahead and does buy up some part of these banks. What would be the advantages of that?
LANGFITT: Well, you can do this really fast. It's just an investment, and with these mortgage-backed securities, they're not going to start buying those up for weeks. You've got to find a price, which is going to be hard because there's no market. And economists say another plus is the federal government, that's us, the taxpayers, we would get preferred stock. So if the banks recovered, any profits we would have first claims to.
One of the problems with the mortgage-backed securities is, a lot of it's junk. We don't know what the price is, and we don't know if we're going to see how much of a profit, if any, we might see when we sold them in five or six years.
BRAND: Now, the British have decided to do this with some of their banks. Has it been done elsewhere and to what success?
LANGFITT: It has. I mean, one of the places that people focus on and point to is Sweden. It was early 1990s they forced their banks to sort of show all their losses. Then they let the weak ones die, and they reinforced the stronger banks, and it did, in fact, work. I mean, the IMF has also looked at this in other countries where it's been successful.
BRAND: And so what do the banks think of this?
LANGFITT: They don't like it. They lobbied against this when the bailout bill was on the floor, and the way they see it, of course, is, when you have a big new shareholder, and it's the government, that could mean a loss of power. The government could have more influence over what the bank executives do. And, of course, when the U.S. bailed out AIG, one of the things that the government did do is, they fired the chief executive.
BRAND: So could it go in for a short term, buy some of the banks' assets. and then sell it back and get out of the banks?
LANGFITT: That would be the hope. I mean, I don't think the government, even if it made this move, it wouldn't want to hold them that long. I mean, critics will look at this and say, it is socialism, and, of course, we're in extraordinary times, and that's why even measures like this are being considered. But I don't think the U.S. government in the long term wants to be in the banking business.
BRAND: NPR's Frank Langfitt, thank you.
LANGFITT: Happy to do it.