Following in the footsteps of the Bailout plan crafted by the British, the U.S. Treasury has announced that they are prepared to buy ownership interests in Banks in order to help ease the financial crisis. The original plan for the $700 billion allocated for the Bailout was to buy up the toxic assets that are in effect bringing down the bank’s financials. As part of the Bailout Bill, though, the Treasury now has the authority to buy up bank stock, and it appears that they are prepared to do just that. This move is being hailed by many as they would much rather see the taxpayer funds purchase bank stock opposed to toxic debt. Others see potential problems with this strategy.
The main problem that people are foreseeing with this strategy is that banks won’t agree to sell their stock to the government. In addition to the new regulations that would be placed on the banks who utilize this measure, including executive compensation restrictions, there would also be market perception to deal with. According to the New York Times, “Treasury officials worry that aggressive government purchases, if not done properly, could alarm bank shareholders by appearing to be punitive or could be interpreted by the market as a sign that target banks were failing.”
In my mind, though, if we are going to bail these banks out, in the interest of taxpayers this is probably the best plan of action. By purchasing shares in these banks there is the potential that the government’s investment could be recaptured, or potentially we could even make some money on the deal. That would be a nice little bonus, although, at this time the bigger concern is saving the system from complete collapse. Capitalizing these banks should help just as much, if not more, than buying toxic debt from them, and I think the risk/reward scenario for taxpayers favors the bank stock plan.