Treasury Secretary Henry Paulson, now that he’s got his initial $250b approved and $450b more if needed (which it will be), has said that it’s not going to quick enough to handpick illiquid securities to buy from banks to help them recapitalize—as the Troubled Asset Relief Program (TARP) plan initially called for. With global markets starting to spiral downward, the quicker, more effective solution is to buy stakes in banks, and Paulson announced that’s now part of the plan:
In a news conference Friday evening, following the Group of Seven meeting in Washington, Paulson said the plan is to offer a term sheet for needy banks. The government will not get voting rights status for its injection in most cases. Paulson said the government’s efforts were focusing on “liquidity” needs and “systemic risk.” Paulson said recapitalization was now “necessary” and would let “taxpayer dollars go further,” because it is a “more efficient” use of capital than the auction process, which is meant to deal with illiquid assets.
The Emergency Economic Stabilization Act of 2008’s vague language gives Paulson almost unlimited power to intervene and leaves much up to interpretation. In that context, some say cash injections could wind up being made to non-depository institutions like investment banks, insurers and hedge funds. A government move to prop up an investment bank-turned bank-holding company, such as Morgan or Goldman is all the more likely given the growing consensus that says Paulson and Federal Reserve Chairman Ben Bernanke erred in not rescuing Lehman Brothers three weeks ago, a date which happens to coincide with the beginning of the market’s deep descent.
The decision not to seek voting rights is an important one. Banks are considered reluctant to give the government that sort of power as a shareholder. By avoiding the issue, the government is increasing its chance of obtaining broad industry acceptance, analysts say.
The move comes as we go into a weekend where Morgan Stanley stock is under extreme selling pressure, even after Mitsubishi Financial bought 21% of Morgan two weeks ago. Some believe that Mitsubishi won’t buy out the majority stake, which would put Treasury in a position to have to rescue them—and they are definitely too big to fail. Their broker dealer operations make them a counterparty to a wide variety of traditional and derivatives trades globally, and if they went down, they’d take an already fragile market with them.