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Bailout Plan Tweaked for Banks

Paulson reworks efforts to inject funds directly into markets

By Mark Huffman
ConsumerAffairs.com

October 14, 2008

Living in a Bubble? Mortgage Crisis? Act Now to Avoid Foreclosure • Avoiding Foreclosure Takes More Than Hope --- • Consumers Fall Further Behind in Payments • House Democrats Seek Bankruptcy Rule Changes • Pending Home Sales Post Record Drop • Home Prices Plunge in October • Navigating the Mortgage Modification Maze • Mortgage Rates Reach 37-Year Low • Boomers Facing Tough Social Security Choices • Is It Safe to Buy a House? • Mortgage Modification Meltdown • Mortgage Defaults Still Rising • Mortgage Rates Take Another Sudden Drop • Fed Slashes Rates to Near Zero • Consumer Prices Plunge in November • Home Values May Fall More in 2009 • Americans' Net Worth Plunges Nearly $3 Trillion • Surge in Mortgage Applications Doesn't Last • Pending Home Sales Slide in October • Get Your Mortgage Rate Lock Ready • Modifying Mortgages Isn't Slowing Default Rate • Mortgage Delinquencies, Foreclosures Surge • Mortgage Applications Surged 112 Percent Last Week • GAO Calls for Better Bailout Oversight • Homes Lose More Value In Third Quarter • Home Prices Post Record Decline • Fed Throws $800 Billion Lifeline to Consumers • Existing Home Sales Drop in October • When in Doubt, Leave Nothing Out • Fannie Mae and Freddie Mac Suspend Foreclosures • Consumer Prices Plunge in October • Paulson Rejects Bailout Money for Detroit • Another Glimmer of Hope in The Housing Market • Buyers' Beware Market • FDIC Backs More Aggressive Loan Modification Plan • Housing 2009 Forecasts Mixed, But Mostly Grim • Foreclosures Up Five Percent in October • Feds Shift Gears On Bailout, Puts Focus On Consumers • More Homeowners Under Water in Third Quarter • Feds Mount New Effort to Help Struggling Homeowners • Lenders Embrace Workouts for Struggling Homeowners • Obama Can't Quickly Raise Homebuyers' Hopes • At Last: Bailout Trickling Down to Struggling Homeowners • New Home Sales Rise in September • How to Appeal Your Property Tax Bill • Existing Home Sales Rise in September • Administration Considers More Help for Homeowners • Foreclosure Activity Drops in September • Southern California Home Sales Surge 65 Percent in September • HOEPA: New Hope for Outlawing Abusive Mortgages • FDIC Chief: Not Enough Help for Homeowners --- • More ...

When Congress debated the controversial $700 billion "bailout plan," the objective was for the government to buy up unmarketable debt securities, thereby establishing a market value for them, and returning liquidity to the marketplace.

Not a word was mentioned about Uncle Sam buying stock in major banks. But in response to actions in Europe, Treasury Secretary Hank Paulson told banking leaders Monday that the government will use $350 billion of the bailout package to purchase preferred stock in their institutions. Oh, and it's an offer they can't refuse.

The objective, administration sources say, is to quickly pump the emergency money into the U.S. financial system. Events are moving too quickly, they say, to wait on setting up the cumbersome system for analyzing and buying bank's bad debt.

The U.S. government will reportedly purchase stock in banks that so far have not been identified as "troubled." They include JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup.

Presumably, the banks will use the money from the sale of their stock to make loans to businesses, to prevent the credit market from seizing up. When European governments announced a similar plan Monday, world stock markets roared their approval. In New York, the Dow Jones Industrial Average posted a one-day record, closing up nearly 1,000 points.

Administration officials say the first $350 billion of the $700 billion bailout package will be spent before the end of this year, and will all go for bank stock, which can be resold later, hopefully at a profit. The remaining $350 billion will be spent by the new president, who will take office in January.

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