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The Treasury gives banks an offer they can't refuse

October 14, 2008

This is incredible:

WASHINGTON — The Treasury Department, in its boldest move yet, is expected to announce a plan on Tuesday to invest up to $250 billion in banks, according to officials. 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, officials said.

The Paulson hedge fund makes its biggest move yet. Move over, the big dog's moving in:

Treasury Secretary Henry M. Paulson Jr. outlined the plan to nine of the nation’s leading bankers at an afternoon meeting, officials said. He essentially told the participants that they would have to accept government investment for the good of the American financial system.

Say hello to your new Director, Secretary Paulson. You're issuing him some preferred stock, because we'd hate to see anything bad happen to your bank.

It's not just for the big banks:

Of the $250 billion, which will come from the $700 billion bailout approved by Congress, half is to be injected into nine big banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase, officials said. The other half is to go to smaller banks and thrifts. The investments will be structured so that the government can benefit from a rebound in the banks’ fortunes.

It will be interesting to see how this works when it is formally announced today. Will community banks also get a big new partner? It will be particularly interesting for S corporation banks, as the S corporation rules do not permit preferred stock.

One hopes that this is temporary, but there are few things as permanent as a temporary government program. It sure looks as though the Treasury is backing off the program to buy up bad mortgage-backed securities in favor of directly recapitalizing the banking system.

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