Video: Will the bank stock purchase program work?

updated 10/20/2008 12:45:17 PM ET 2008-10-20T16:45:17

Treasury Secretary Henry Paulson said Monday government purchases of stock in banks represent an investment that should eventually make money for the taxpayer.

Paulson said the government will own shares in the banks that should be paid back with a reasonable return and the government also will receive warrants for common shares in the banks.

“This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything,” Paulson said at a Treasury briefing. “This program is designed to attract broad participation by healthy institutions and to do so in a way that attracts private capital to them as well.”

Paulson said the program’s goal is to increase investors’ confidence in banks while also boosting the confidence of the banks so they will “deploy, not hoard, their capital.”

His comments also included details of a streamlined application process for banks to apply to sell shares to the government by a deadline of Nov. 14.

The application process features a two-page form that banks must fill out and return to their primary regulator who will review it and then forward it to the Treasury Department. Treasury will make the final decision on which institutions will receive stock purchases.

Paulson on Oct. 13 summoned nine of the country’s major banks to the Treasury Department where he pressured them to agree to sell preferred stock to the government. Paulson wanted the largest banks participating to remove any stigma from other banks going to the government to sell stock.

Those firms, which account for 50 percent of the deposits held in the country, will receive $125 billion in stock purchases by the government. The government will use the other $125 billion to purchase stock in potentially thousands of other banks and savings and loans nationwide.

Paulson said all stock sales to the government would be announced within 48 hours of their execution.

The $250 billion in direct stock purchases are part of a $700 billion government rescue program for the financial system that Congress passed on Oct. 3.

In a background briefing, senior officials from the various agencies involved in the program said the next round of government stock purchases beyond the initial $125 billion going to the nine major institutions will start occurring as quickly as the government receives applications and they can be processed.

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These officials indicated there was widespread interest from banks in receiving the stock purchases as a way of bolstering their capital resources. They said the government will not wait until the Nov. 14 closing date for applications to start making stock purchases.

Banks are limited in the amount of loans they can make based on how much capital they have because that capital serves as a cushion against bad loans that are not repaid. The government’s hope is that by increasing banks’ capital, it will encourage the institutions to resume more normal lending patterns and help end the severe credit squeeze facing the country.

Making the direct stock purchases will represent a partial nationalization of the banking system and bears similarities to a program that President Herbert Hoover began in 1932 during the Great Depression.

While the administration did not emphasize this approach as it was lobbying Congress for approval for the $700 billion rescue package, Paulson said last week that officials had decided to pursue the stock effort given the renewed turmoil in the global financial system.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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