Banks Nationalized.

[stephendare]

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/13/AR2008101300184.html?nav=rss_business

wow.  welcome to the Socialist States of America.

The Stock Market loved it though.  But these days almost all the stock brokers seem to be just crazy for socialism.

News that European governments also planned to take stakes in their banks and anticipation of new U.S. measures unleashed a tremendous surge in U.S. stock prices yesterday, with the Dow Jones industrial average soaring to the biggest percentage gain since the 1930s, up 11.1 percent. It ended 936.42 points higher, the largest point gain ever, just days after the Dow had its steepest weekly decline in history.

The Treasury Department's decision to take equity stakes in banks represents a significant reversal, coming just weeks after Treasury Secretary Henry M. Paulson Jr. had opposed the idea. In a momentous meeting yesterday afternoon in Washington, Paulson, flanked by top financial regulators, told the executives of nine leading banks that they needed to participate in the program for the good of the national economy, two industry sources said on condition of anonymity because they were not authorized to speak publicly.

The government's initiative, which was to be announced this morning before the markets open for New York trading, is part of a wider plan that goes beyond the $700 billion rescue package approved by Congress earlier this month. The Federal Deposit Insurance Corp. is also set to announce today the launch of an insurance fund to guarantee new issues of bank debt. It will provide unlimited deposit insurance for non-interest-bearing accounts, which are widely used by small businesses for payroll and other purposes.
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In pressing the bank executives to accept partial government ownership, Paulson's message was clear: Though officially the program was voluntary, the banks had little choice in the matter. In exchange for giving the Treasury minority stakes, the nine firms would jointly receive an investment worth $125 billion. The government would make another $125 billion available for the next 30 days to thousands of other banks and thrifts across the country.

Federal officials set conditions, telling the banks they could not raise their dividends without government permission and could not offer their executives new retirement packages, though the old packages would remain intact.

Paulson told them the moves would shore up confidence in their own institutions, spark lending throughout the system and send a message to smaller institutions that there is no stigma in accepting federal funding. Though some were reluctant, all of the executives complied.

There is a risk that banks will take the new government capital and use it to bolster their balance sheets but still not resume lending, and the Treasury is not getting any specific contractual guarantee to prevent that from happening. But bank regulators, particularly the Federal Reserve, will lean heavily on the firms receiving infusions to use the capital to increase their lending to businesses and consumers.

Taken together, the steps planned by the Treasury, the FDIC and the Federal Reserve amount to a monumental effort to jump-start the business of lending, which all but dried up in recent weeks as banks have lost faith in one another and their customers. Global markets began to melt down. Some emerging nations teetered on the brink of financial collapse.

Over the weekend, global leaders agreed in meetings in Washington to launch a coordinated program of injecting cash into the world's banks and guaranteeing their debt. The action by U.S. officials yesterday represented the U.S. version of those broad principles, and it was matched by similar efforts in Europe yesterday.

As part of the effort to flood the financial system with cash, the Federal Reserve made unlimited funds available early yesterday to other major central banks so they could inject money into banks in their countries and ease the shortage of dollars they face. Previously, the Fed's program of lending dollars to the European Central Bank, Bank of England, Bank of Japan and others had been capped at a total of $380 billion.

Under the rescue legislation signed into law earlier this month, the Treasury is allowed to take equity stakes in banks.

[Doctor_K]

Washington, Monroe, Madison, Adams, Jefferson, and Jackson are all convulsing in their graves.

[Driven1]

yes, they are.  sad days indeed.

[Doctor_K]

Something to ponder over.  Not sure I share the (perceived) underlying "everything's gonna be fine!" notion, but an educational read all the same:

From the New York Times:

"Intervention Is Bold, but Has a Basis in History"
After a week of mounting chaos in financial markets around the globe, the United States took a momentous step that shifts power in the economy toward Washington and away from Wall Street.

The government’s plan to prop up banks large and small â€" along with recent bailouts as well as guarantees to support business loans, money markets and bank lending â€" represents the most sweeping government moves into the nation’s financial markets since the Great Depression, and perhaps ever, according to economists and finance experts.

The high-stakes program is intended to halt the worst financial crisis since the 1930s. If successful, it could long be studied by historians as a textbook case of the emergency role that government can play to rescue a teetering economy.

Rest of the article here:  http://www.nytimes.com/2008/10/14/business/economy/14nationalize.html?partner=rssyahoo&emc=rss

Worth the read.

[Shwaz]

http://www.cnn.com/2008/POLITICS/10/14/miron.banks/index.html

Last but not least, a government "injection of liquidity" is still a bailout in all but name.

The injection means that banks get cash, and they get it now. This benefits current stockholders and bondholders, which is why stocks have jumped on news of the injections.

The government, however, gets stock that might end up being worthless, since some banks will fail anyway. The government gets stock that may never trade in a market or have its value determined by fundamentals. The government gets stock that it cannot sell for years, if ever, without generating turbulence in asset markets as investors interpret the government's decisions or position themselves to profit from them.

[RiversideGator]

Washington, Monroe, Madison, Adams, Jefferson, and Jackson are all convulsing in their graves.

Actually, bank bailouts go all the way back to Alexander Hamilton and the Panic of 1792.  They are as American as apple pie.
http://www.startribune.com/business/29726084.html?elr=KArks:DCiU1OiP:DiiUiacyKUnciatkEP7DhU