The Treasury Department is expected to announce its bank rescue program, which entails making use of its authority under the $700 billion Trouble Assets Repurchase Program to buy pretty much anything it wants to. The Wall Street Journal provides the latest reading on what the plan might entail:
The initiatives will likely supersede many of the government’s previous efforts. They are being formulated jointly by the
Treasury Department, Federal Reserve and Federal Deposit Insurance Corp., and ensure that the U.S. banking sector will be tied to the federal government for years to come.
One central plank of these new efforts is a plan for the Treasury to take approximately $250 billion in equity stakes in potentially thousands of banks, according to people familiar with the matter, using funds approved by Congress through the $700 billion bailout bill.
In addition, the FDIC is expected to temporarily extend its backstop from bank deposits to new senior preferred debt issued by banks and thrifts for three years. That would be an aid to companies that have had a hard time raising capital without government assistance.
The FDIC is also expected to temporarily lift the insurance limits for non-interest bearing bank deposit accounts. This would extend beyond the $250,000 limit per depositor that lawmakers agreed on two weeks ago. The shift brings U.S. policy more in line with other countries that have offered blanket deposit insurance to try and prevent customers from withdrawing large sums of money from financial institutions.
Other moves could include temporary loan guarantees aimed at helping banks borrow the money they need to do business. Officials are still working through how such a plan would work.
Michael Shedlock has a worthwhile post up on the banking system rescue programs being put into place. Key observation:
To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.
This would not be as bad as Shedlock suggests IF there was also, as in the best-practices model of Sweden, some punitive elements (getting rid of incumbent management, wiping out shareholders, nationalizing banks, which in the Swedish case enabled the taxpayer to profit) and a plan to rationalize (as in shrink in an orderly fashion) the industry. Instead, the Treasury appears to be trying to prop up the industry in place. That is not likely to be a winning formula.