The WSJ is reporting that the bank-rescue plan to be unveiled by Treasury Tuesday will call for the government to spend the first $250 billion of its TARP stash buying equity stakes in banks–“potentially thousands of banks”–and for the FDIC to temporarily insure all non-interest-bearing deposits and new senior debt issued by banks and thrifts.
It’s similar to the approach adopted by the major European countries over the past few days, with the main difference being that no European country has thousands of banks. That seems like it might be a big deal: Pouring capital into thousands of institutions is a very different business from selecting a few banks that need help, buttressing their balance sheets, and replacing their management (what the UK has done). But there’s probably no way Treasury could just recapitalize a few big banks and leave the rest of the industry to its own devices. Which inevitably complicates things here.
What I’m still wondering, though, is why the heck this took so long. I had a long talk this afternoon with Spencer Bachus, the ranking Republican on the House Financial Services Committee, and he said that he and other members of Congress from both parties had suggested alternatives like direct recapitalization of banks and increased deposit insurance as far back as September 18, when Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke first came up to Capitol Hill to announce that the economic world was going to end unless Congress did something fast. But Paulson resisted these suggestions in favor of his mortgage-security-purchasing plan, and continued to resist them until … he finally changed his mind.
Update: More detail from the WSJ:
The U.S. government is set to buy preferred equity stakes in nine top financial institutions as part of its new comprehensive plan to tackle the credit crisis, according to people familiar with the situation. It’s unclear how much would be invested in each institution. The move is designed to remove any stigma that might come with a government investment. Not all of the banks involved are happy with the move but agreed under pressure from the government.
Maybe it’s just because I watched The Incredibles yesterday (you know, “if everybody is special, then nobody is”), but I don’t know that I like this approach. Shouldn’t the whole point be to put money into, and punish the shareholders of, the institutions in trouble while letting the healthiest fend for themselves and reap the eventual rewards?
Update 2: Felix weighs in, and has similar worries about Paulson’s unwillingness to entirely bite the bullet here:
I’m quite sure that Paulson hates the fact that he’s semi-nationalizing the banking system. But he needs to get real and accept it, rather than trying to brush it under the carpet. Otherwise he’s putting hundreds of billions of taxpayer dollars at unnecessary risk.
Update 3: The details are out.