With the big day on Wall Street, it now, surprisingly, looks like there's wind at the sails of the American government response to the crisis, which before today has looked either orthagonal or slow. You can't say that the government hasn't exercised its bailout authority anymore:
Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.
A side note: State Street's CEO wasn't at the meeting where the capital was allocated. They still got the money, but so did the other smaller institutions getting the as of this writing unknown $125 billion remaining of the $250 billion outlay.
The question is: do the owners want the equity? Mitsubishi won't be diluted by the government action, but we don't yet know what conditions Treasury is imposing, or what, exactly, the nationalization means for the existing equityholders of the banks. We do know that the American response follows the British example.
Okay, is this legal? I think it is. As bailout czar Neel Kashkari said:
The law gives the Treasury Secretary broad and flexible authority to purchase and insure mortgage assets, and to purchase any other financial instrument that the Secretary, in consultation with the Federal Reserve Chairman, deems necessary to stabilize our financial markets -- including equity securities. Treasury worked hard with Congress to build in this flexibility because the one constant throughout the credit crisis has been its unpredictability.
I may be missing something, but I'm not sure where the Fed is designated to be the special consultant with Treasury. Perhaps that's more related to the facts on the ground than the precise legal authority given by EESA. But as we've already told you, courtesy of Congress, Treasury has the authority to do equity injections in lieu of buyouts.
Here's the Times on precedent for taking equity.
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1. Posted by fedgovernor on October 14, 2008 @ 4:30 | Permalink
I'm just curious how these bankers are going to feel once Barney Frank takes a seat on their board (virtually, or actually) and starts dictating that the banks lend vast sums of the governments newly deposited equity to deadbeats and illegal aliens (or only to party loyalists.)
Because once the government is all up in yo bidness ... experience suggests that is exactly what's about to happen.
2. Posted by BailoutBlogger on October 14, 2008 @ 11:16 | Permalink
I think Kashkari's reference to the Fed chair comes from Section 3(1)(9)(B) of the Act, which provides that the category of "troubled assets" can be expanded beyond mortgages and mortgages if the Secretary, after consultation with the Fed Chair, determines that the purchase of other types of assets "promotes financial stability."
What EESA doesn't clearly provide, at least on my reading, is authority for the interbank loan guarantees or the increase in FDIC insurance beyond $250,000. There may be some preexisting authority for these steps, however - I just don't know.
Legal issues presented by EESA 2008 are analyzed at the Bailout Law Blog on blogspot.
3. Posted by Jake on October 14, 2008 @ 20:51 | Permalink
Hurling many billions of taxpayer dollars at government equity investments in banks, as a "cure" for the financial crisis, is like handing a flagon of rum to a drunken sailor.
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