Government Moves Forward With Bank Equity Purchase Plan

Apparently the government has woken up and decided to move forward with a plan to take equity stakes in the nation’s banks:

(From the Associated Press): “WASHINGTON - Treasury Secretary Henry Paulson said Friday that the Bush administration will move ahead with a plan to buy stock in financial institutions.

Paulson said the program to purchase stock in financial institutions will be open to a broad array of institutions.

The administration received the authority to make direct purchases of stock in banks in the $700 billion measure Congress passed last week to rescue the nation’s financial system.

It would mark the first time the government has taken equity ownership in banks in this manner since a similar program was employed during the Great Depression.

Paulson announced the administration was moving forward with the program during a news conference at the conclusion of discussions among finance officials of the Group of Seven major industrialized countries. That group endorsed the outlines of a sweeping program to combat the worst global credit crisis in decades.

“As we develop plans to purchase equity … we are working to develop a standardized program that is open to a broad array of financial institutions,” Paulson said in a statement.

Paulson said the government’s program would be designed to complement the efforts of banks to raise fresh capital from private sources. He said that the government’s stock purchases would be of nonvoting shares so that the government will not have power to run the companies.

The purchase of equity stakes in companies would be in addition to the main thrust of the $700 billion rescue effort, which involves purchasing distressed assets off the books of financial institutions as a way of unthawing frozen credit markets and getting banks to resume more normal lending operations.

Paulson told reporters the administration was moving “swiftly and thoughtfully” to implement the new rescue package.

The administration is expected to start making announcements next week of the private sector asset management firms that will be selected to help run the program.”

Hey, better late than never; I’m quite pleased that Paulson is shifting gears a bit and deciding to allocate some funds towards equity investments into the banks as it I think it’s a vastly superior recapitalization strategy. Perhaps the performance of the Dow over the past week has been the resounding critique that the administration needed in order to encourage them to shift gears. My only concern (at this point) is the funds allocation between direct investments into the banks and TARP’s purchase of mortgage securities, because (at this point) it appears that Paulson is still committed to purchasing mortgage securities as part of a banking bailout plan.

Finally isn’t it a bit odd that TARP quietly included a provision for the purchase of equity stakes in bank, yet the administration and the politicians in favor of the bill never mentioned it and focused entirely on the aspects of the bill focused on purchasing mortgage securities? Especially when many of the plans most vocal critics favored equity investments in the banks, and mentioning the provision for equity investments would’ve made it easier to sell the plan to Wall St., the public and other politicians?

Better yet (especially in light of the market’s recent performance) it would’ve been smarter to just sell the plan as a $700 billion appropriation of money, which could be used in a multitude of ways to stabilize the banking system: direct loans, equity investments, debt guarantees, asset purchases, etc, instead of just focusing on one strategy.

But that’s just me being a professional critic; at this point I’m just glad the administration is moving forward with the equity investment plan. Let’s hope that they eventually abandon the asset purchase plan all together.

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Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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