20 April 2009

One Step Closer to Nationalization

This evening's Marketplace (NPR) spent a great deal of time on an interview between Kai Ryssdal and John Dimsdale. Their discussion raised my hackles almost immediately, mostly because they nailed the Obama Administration's moves to take control over large banks. It's probably a violation of copy right laws to copy the entire inteview (I strongly suggest you read and listen to it), but I'll comment on some key moments.

The interview started by referencing a New York Times article from this morning that explained that the government may convert its preferred shares in banks into common stock.
And not helping at all was a story in The New York Times today that the Treasury Department's thinking about changing the terms of the investment it made in the big Wall Street banks as part of the bailout package. Our Washington Bureau Chief John Dimsdale is here to explain what might be happening. And why.

According to the NYT article, the Obama Administration is touting this as a means of sparing Congress from putting more funds out:
President Obama’s top economic advisers have determined that they can shore up the nation’s banking system without having to ask Congress for more money any time soon, according to administration officials.

It's probably true that the Administration would have trouble getting Congress to agree to more TARP funds at this point (they're taking enough flack on TARP 1 & 2). But is the Administration being honest?
In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.

Kai and John certainly don't seem to think so.
DIMSDALE: Right, common shares are voting shares. The government can easily become the biggest shareholder of some banks and decide who is going to be on the board. It'll influence other decisions, business decisions. Not to mention the potential conflicts of interest when the nation's lawmakers become big shareholders of a company. Buying common shares is much closer to nationalizing the banks.

That's right boys and girls, the Administration is pushing all the buttons to make conservatives hot under the collar, but depsite the nasty 'n' word being thrown around, it's not the worst thing that could come out of the Administration's strategy:
DIMSDALE: Well, there's no guaranteed return with common stocks. And there are no dividends. Taxpayers are not at the head of the line to be paid back. There is more of an upside potential if banks turn around, and that would be good for government revenue and the taxpayers, but that dilutes the returns for private, common-share investors. Which is why the banks that have the ability will try to, as soon as possible, get out from under the government investments. Jeff Davis thinks that in the near future some of the stronger banks, perhaps Goldman Sachs, J.P. Morgan, BB&T Bank, will raise private capital, buy back the government investments, and that would be good for them, Davis says, but not for others.

So, under this strategy, the government buys the largest shareholder position, using our tax dollars, and we're less likely to get repaid. The banks obviously don't want this happening, so they're going to try to repay the TARP funds just as quickly as they can, but:
The government is going to be left with wards of the state, or quasi zombies. And the J.P. Morgans and the BB&Ts are saying, in effect, we don't want to be part of that crowd.
Ryssdal: Yeah and of course the next big battle is whether or not the banks are even going to be allowed to repay back that TARP money, right?

Thanks, Kai! You made my drive home so much more acid-inducing than it already is!

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