New York, 15 Oct, 2008. Treasury Secretary Henry Paulson cajoled the nine largest banks in the US to sell $250 billion of shares yesterday. This is the largest US taxpayer-funded rescue plan of banks ever, and not everybody is happy.
What happened to Adam Smith’s “invisible hand”, or as Milton Friedman described it, “the possibility of cooperation without coercion”? Isn’t the United States supposed to be the poster child of the free market? The archetype of capitalism and private ownership?
A New York Times report says that the Treasury’s share buy was met with considerable resistance. For example, Wells Fargo Chairman Richard M. Kovacevich insisted that his firm was in no need of the buy, as Wells Fargo does not hold these toxic assets.
The report said an anonymous insider remarked, “It was a take it or take it offer. Everyone knew there was only one answer.”
US citizens are naturally the most perturbed – it’s almost unthinkable that the US government would own shares in so many large financial institutions.
"Government owning a stake in any private US company is objectionable to most Americans, me included," he said. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."
Capitalist Pig CEO Jonathan Hoenig, expressed his dissatisfaction for the approach, "It's a major negative for the economy. It pushes this country further and further toward socialism. We now join the Soviet Union, North Korea and Cuba as countries in which the government owns, it doesn't just referee, but owns a major stake in the financial system. That's been a disaster for any economy that's ever tried it. It's not the government's role to own banks."
Economist Alan Reynolds, from the Cato Institute, echoed these sentiments "Public ownership of mortgage-backed bonds is merely an investment. Public ownership of equity is socialism."
But according to Paulson, the idea is to get the nation’s largest banks back lending to each other to revive the financial system as a whole. Without more capital, they cannot do that, he said.
“I don’t think there was any banker in that room who was going to look us in the eye and say they had too much capital,” Mr. Paulson continued. “In a relatively short period of time, people came on board.”
Most people believed the government’s $700 billion bailout package was to buy up the bad debt of the banks that were going under – not to simply invest in the largest. However, a clause added to the bill states that the government can also buy shares.
President Bush said, "This new capital will help healthy banks continue making loans to businesses and consumers. And this new capital will help struggling banks fill the hole created by losses during the financial crisis."
The firms involved are Bank of America, Wells Fargo, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley and Bank of New York Mellon Corp. State Street Corp and Merrill Lynch.
Ron Portobello, EconomyWatch.com