Stock Injection in the Paulson Plan…
October 5, 2008
In this lively NPR podcast (see player under photo of archer) Adam Davidson discusses the Paulson Plan with, host, Ira Glass in response to a plea from a listener: ‘Please help me understand if I should support the bailout’.
They being by discussing the problem of pricing the toxic mortgage backed assets for sale to the government. The argument is that intervention engenders more uncertainty in the markets since it is not known how the government will determine prices.
But soon they switch to to a discussion of a plan called a ‘stock injection plan’ contrasting it to the Paulson Plan. Instead of just giving 700$ billion to the banks in exchange for lousy securities, stock injection means that the government would receive preferred stock: the tax payer would be the last ones to lose money if the value of the banks declined. According to the informal poll by these journalists, this is the option overwhelmingly supported by economists.
This smells of socialism to conservative Republicans, but it also rubs banks the wrong way. They suggest that thousands of lobbyists have been hired to refute the idea of a stock injection plan.
The kicker is that according to these commentators, there is subtle language in the bills that passed in both the house and senate that makes stock injection as an option that can be employed at the discretion of the treasury secretary.
To see for yourself, the full senate bill can be viewed here (*Note the deep expression of disapproval from ‘constitutent’ comments on this site). NPR host Laura Conway has identified the following as the relevant passage:
IN GENERAL.The Secretary may not purchase, or make any commitment to purchase, any troubled asset under the authority of this Act, unless the Secretary receives from the financial institution from which such assets are to be purchased
1. in the case of a financial institution, the securities of which are traded on a national securities exchange, a warrant giving the right to the Secretary to receive nonvoting common stock or preferred stock in such financial institution, or voting stock with respect to which, the Secretary agrees not to exercise voting power, as the Secretary determines appropriate; or
2.in the case of any financial institution other than one described in subparagraph (A), a warrant for common or preferred stock, or a senior debt instrument from such financial institution, as described in paragraph (2)(C).