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Treasury Weighs Investing In Banks
Treasury Secretary Paulson has to work out critical issues in a plan to take an ownership stake in banks, such as how many institutions should be included.
(By Win Mcnamee -- Getty Images)
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But key Congressional aides said yesterday that providing direct infusions of cash would probably trigger the stricter standard.
"My sense is that Treasury would be playing with fire if they think for a second they can skirt the restrictions in the bill," one aide said, speaking on condition of anonymity because the details of the plan are not final.
Until now, Treasury officials had indicated that much of the $700 billion would be used to purchase troubled assets through auctions that force financial institutions to offer the Treasury the lowest possible price. But the Emergency Economic Stabilization Act gives Paulson expansive powers to purchase other kinds of securities, as well.
The law defines troubled assets as mortgages or securities backed by mortgages in a plummeting housing market, or "any other financial instrument that the Secretary . . . determines the purchase of which is necessary to promote financial market stability," including stocks. If Paulson chooses to apply the more creative definition, he must consult with Federal Reserve Chairman Ben S. Bernanke and notify Congress.
Moments before the House voted last week to approve the measure, lawmakers discussed their explicit intention to permit Paulson to fund a "capital infusion."
"This was always intended to be an option. The only question is, when, how and to what extent," Sen. Charles E. Schumer (D-N.Y.) said in a statement yesterday.
Many academics and economists have pushed for the government to make direct capital investments in banks, arguing such a program would be a much more effective vehicle to encourage new lending than buying up troubled assets.
But the Treasury faces significant difficulties in designing an effective plan. Experts say recapitalization would only serve to encourage new lending if the government focuses its investment on healthy banks instead of troubled ones.
"If it just focuses on troubled institutions, then it's not going to have the intended effect of reenergizing the credit market," said Campbell Harvey, a Duke University finance professor. "Troubled institutions don't deserve the capital. You're throwing good money at bad, helping an institution that might go under anyway."
The banking industry strongly opposes government investment in a large number of banks. The American Bankers Association, a trade group, yesterday cautioned the government against a broad plan that might carry the implication that a large number of American banks need help.
The administration could take a middle road by creating a voluntary program open to all banks. But experts said that might amount to a public relations gesture, with few banks stepping forward to participate.
Staff writer Dan Eggen contributed to this report.
