Jed Rothwell wrote:
> However, during the time the government is the majority shareholder, or > the top lender, it must have a controlling interest! Otherwise they will > just steal the money. I fear they are doing that already, because some > of the deals Bush cut gave the Feds non-voting stock, which is insane. > It is like wearing a big sign on your back saying "steal from me!" In defense of the Bush deals, it was *not* insane; it may have been a bad idea but the reasons for choosing that route made some sense. In short, it was a tradeoff, and while you may feel they could have chosen a better path, the one they picked was at least somewhat defensible. Of course, the goal was *not* to nationalize the banks, rather the opposite: The hope was that if the banks were propped up then private investment dollars would flow into them again. But fixing things up without nationalizing the banks is a little tricky. If the Feds had extracted piles of (new) common stock from the banks that would have diluted existing investments, effectively screwing common stock holders, and in fact resulting in de facto nationalization. That's *not* what you want to do if you're hoping to attract new money into the institution's common stock; in fact it's likely to scare away potential investors. In short, if you don't want the government to end up owning the banks, then don't do that! Convertible debentures have much the same problem; the "conversion" feature decreases the fully diluted value of common stock shares, which again scares off investors and leaves the government playing alone. A major part of the problem was a collapse in the price of the common stock of the banks; propping up the stock price was one goal. If that had been the only goal, then buying existing stock on the market might have been the best approach (ignore for the moment the fact such an approach is also likely to put the government squarely in the banking business). However, just buying common stock on the open market -- which props up the stock price while avoiding diluting existing shareholders -- is a very indirect way to stimulate *lending* by banks. The problem wasn't just that the bank stocks had collapsed; it was that the money market had frozen up. So, direct injection of capital into the banks, rather than indirect injection by purchase of existing stock, was clearly needed. And that means open market purchases of bank stocks were not likely to do the job. So what to do? Give the banks money directly, which you need to do to get the money circulating again, and either you get common stock in exchange, and nail the stockholders, or you get something else, and then you don't get voting control. Neither is ideal. Bush's people chose the latter. I'm not sure the former would have been better. Of course, there were strings attached to the money, but no doubt one can argue that they were not sufficiently strong or numerous.
