Sunday, October 19, 2008

Government Takes $250 Billion Stake in Banks

The U.S. Treasury announced plans today to purchase up to $250 billion in preferred stock from the nation's top banks. The move is part of a plan that President Bush says will help prevent recession and preserve the free market.

"Government owning a stake in any private U.S. company is objectionable to most Americans – me included," Treasury Secretary Henry Paulson said in a statement. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable. When financing isn't available, consumers and businesses shrink their spending, which leads to businesses cutting jobs and even closing up shop."

Nine major financial institutions have already agreed to the voluntary plan. Combined, these institutions will receive $125 billion in capital from the government. The banks are:

  • Goldman Sachs Group Inc.
  • Morgan Stanley
  • J.P. Morgan Chase & Co.
  • Bank of America Corp.
  • Citigroup Inc.
  • Wells Fargo & Co.
  • Bank of New York Mellon
  • State Street Corp.
As part of the voluntary program, the government will buy stock "on attractive terms that protect the taxpayer," according to a joint statement by the Treasury, Federal Reserve, and FDIC.

The shares be non-voting, unless the matter directly affects the government's rights as a shareholder. Banks that agree to be part of the program will accept restrictions on executive compensation while the government is holding the stock.

Paulson said taxpayers should expect a "reasonable return" from the stock and said the government will also receive warrants to buy additional stock from institutions participating in the program.

"The actions today are aimed at restoring confidence in our institutions and markets and repairing their capacity to meet the credit needs of American households and businesses," Federal Reserve Chairman Ben Bernanke said in a statement.

Source: U.S. Treasury, Wall Street Journal

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