Free to Choose – Part II
My last post discussed what was happening to small banks in the midst of the “bailout”; this post provides a similarly scary account of the meeting that U.S. banking officials had with the CEOs of the nations largest banks. The full account is here in the Wall Street Journal (you may need a subscription).
Among the highlights:
- As the meeting neared a close, each banker was handed a term sheet detailing how the government would take stakes valued at a combined $125
billion in their banks, and impose new restrictions on executive pay and dividend policies.
-Mr. Geithner, whose job as New York Fed chief makes him the central bank’s main man on Wall Street, delivered the most sobering news. He described
how much preferred stock the government was going to buy from each firm. The government would take $25 billion in Citigroup, $10 billion in Goldman
Sachs Group Inc., and so on.
-The CEOs shot off questions, peppering officials for details about how the share purchases would be structured and how it might constrain them. At
one tense moment, Mr. Bernanke jumped in to calm nerves. The meeting didn’t need to be confrontational, he said, describing paralysis in the market
and the threat that posed to everyone in the room.
-”The system needs more money, and all of you will be better off if there’s more capital in the system,” Mr. Paulson told the bankers.
- During the discussion, the most animated response came from Wells Fargo Chairman Richard Kovacevich, say people present. Why was this
necessary? he asked. Why did the government need to buy stakes in these banks?
Let us assume that, in fact, too much credit has caused this awful crisis. Apparently, when too much bad credit causes a financial meltdown, the way to solve the problem is by providing more credit AND using taxpayer funds to literally take stakes in the private financial companies with the bad debts on their books. Taxpayers should relax, though, because now these banks have to pay dividends to the government, so the taxpayers don’t really have that much risk.
I must have missed this lecture in my monetary theory classes.
As for Mr. Paulson’s assertion that the system needs more money, I realize there are many different measures of credit, but I’ve checked available data and several measures indicate the same upward trend. For example, according to the Fed, the broadest measure of outstanding debt, in billions, went from 31,829 in 2002 to 51,019 in the second quarter of 2008. Net lending has dropped this year, back to early 2002/2003 levels, but at this point we are probably looking at the paralysis that, in my view, the government has contributed to.
I don’t know what is worse here, the fact that the government is hell-bent on taking ownership stakes, or the fact that they are insistent on using even more credit to solve a credit crisis. If this really is the worst crisis since the great depression, no amount of additional credit will solve the problem.
NM