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How Free-Marketers Crafted Bank Program
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''You don't want something that people scream over," Davis said. "That doesn't settle markets either.''
Given what amounted in some ways to a blank slate, Nason, Norton and Jester set to work. One of the key questions that arose: What should the government get in return?
Guided both by the rescue legislation and their instincts, Nason, Norton and Jester decided that in return for the government investment, the banks should give the government preferred stock shares.
Such shares have no voting rights -- that way, the government would not be in a position to influence the bank's operations, just as a free-marketer would hope.
The next critical question was how much the preferred shares should pay the government. Private investors were getting 9 or 10 percent on investments in financial institutions. But Nason's team wanted the program to attract banks, and they needed to offer a cheaper dividend rate to overcome the institutions' dislike of becoming entangled with the government.
Jester, relying on his contacts in the market, as well as Nason, decided that they should demand only a 5 percent dividend rate.
Paulson approved a 5 percent rate for the first five years. After that, the dividend rate would rise to 9 percent to encourage institutions to repay the government. The other politically charged decision was whether to force banks that took the money to abide by strict controls on executive compensation.
Free-market adherents typically argue that a company should be free to pay whatever it likes because it knows best how to maximize its profits. While Nason didn't express a strong view on executive pay provisions, the political advisers believed that more had to be done to limit pay.
Nason's team was "always looking at the goal of making the program attractive to healthy banks," Davis said. They "were leaning to the lower standard. They didn't want banks to be saying, 'No way, why would we be doing this?'
"Those of us who were more in the business of giving political advice asked, 'Well, how is the taxpayer protected?' "
The result: While not required by the legislation, the banks would be subject to what some analysts said was the most restrictive compensation limit in the law. Still, it wouldn't stop banks from richly rewarding their executives.
"The challenge all along was achieving the dual objective," Nason said. "The program had to be attractive enough to get banks to enroll and at the same time we had to protect the taxpayers."
