Tuesday, October 14, 2008

Uncle Sam to invest $250 billion in US banks as part of $700 billion bailout plan

U.S. Investing $250 Billion in Banks, NY Times:

The Treasury Department, in its boldest move yet, is expected to announce a plan on Tuesday to invest up to $250 billion in banks... The United States is also expected to guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers.......

........The preferred stock that each bank will have to issue will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years. The government will also receive warrants worth 15 percent of the face value of the preferred stock. For instance, if the government makes a $10 billion investment, then the government will receive $1.5 billion in warrants. If the stock goes up, taxpayers will share the benefits. If the stock goes down, the warrants will be worthless......

This isn't the first time its happened. During the World War, in 1917, Washington did seize the railroads and transport so that goods, soldiers would move freely. This proved to be helpful in the smooth flow of defense requirements. As the war ended next year, railroads were restored to private ownership (they were actually returned 3 years later, and the stockholders were compensated in 1920).

Though this recapitalization of banks will prove beneficial for the whole financial system, here is what Mike "Mish" Shedlock has to say:
To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.

What are your comments? Let out your smart opinions too......


Like such articles? Sign-up for the email updates which means you’ll be the first to know of any new articles/posts on this blog.