Treasury Can Keep Ownership Stake in Banks As Long As It Wants

Daily News Article   —   Posted on October 20, 2008

(by Matt Cover and Mary Jane O’Brien, CNSNews.com) – The U.S. government is under no obligation,
ever, to surrender any of the assets it purchases as part of the
federal financial bailout plan, a Treasury Department official told CNSNews.com on Friday.

That includes the ownership interest the Treasury is buying in nine
major banks and the shares it hopes to purchase in perhaps hundreds of
other smaller banks around the country.

“It would be (left) up to the government’s discretion as to when they
would want to sell it (private assets) back,” spokeswoman Jennifer
Zuccarelli said.

Under the bill signed by President Bush, only the Treasury Secretary’s
purchase authority is set to expire, not the authority to hold or
relinquish assets held by the government.

“We can hold them for as long as we want,” she said. “We just can’t purchase after that date.”

Under the law, the sunset date for the government to purchase assets is Dec. 31, 2009, unless Congress extends it.

Last Monday, as part of the financial industry bailout bill, the
Treasury announced a program in which the government will purchase up
to $250 billion of “senior preferred shares” –i.e., stock– in a
variety of U.S.-controlled banks, savings-and-loans and other
institutions.

The stock held by the Treasury will be required to pay dividends to the
government at the rate of 5 percent for five years, a figure that is
set to rise after five years to 9 percent, according to guidelines.

In fact, according to guidelines issued by the Treasury Department,
companies can not buy their shares back for three years, unless they
raise 25 percent of the shares’ value in private capital.

The stock “may not be redeemed (repurchased) for a period of three
years from the date of this investment, except with the proceeds” from
the sale of assets “which results in aggregate gross proceeds of not
less than 25 percent of the issue price (of the stocks),” the
guidelines state.

After three years, the shares can be bought back at their original
selling price. This means that if a participating bank wanted its
assets back, it would have to give back the entire amount it had
received from the Treasury.

“The banks can choose to give the money back after three years,”
Zuccarelli said. “They have to give us the same amount of money back.”

However, the decision on whether to actually re-sell the stock to the
banks rests solely with the Treasury Secretary and there is no timeline
under the law for re-privatizing government-held stocks and assets.

“The Secretary may, at any time, upon terms and conditions and at a
price determined by the Secretary, sell … any troubled asset purchased
under this act,” the law says.

The law, formally titled the Emergency Economic Stabilization Act of
2008, explicitly grants sole authority to the Secretary of the Treasury
to purchase, hold, and sell troubled assets.

“The Secretary,” says the law, “is authorized to take such actions as
the Secretary deems necessary to carry out the authorities in this Act,
including, without limitation, the following: … In order to provide the
Secretary with the flexibility to manage troubled assets in a manner
designed to minimize cost to the taxpayers … to purchase, hold, and
sell troubled assets and issue obligations.”

When the bailout bill was debated and passed by Congress, it was
generally assumed that the $700 billion the law provided to the
secretary of the Treasury to stabilize the financial markets would be
used to buy mortgages and mortgage-backed securities.  It was not
generally believed the law was being enacted to empower the secretary
to buy an ownership interest in banks.  However, the actual language of
the law authorized the secretary not only to purchase mortgages and
mortgage securities but also what was sweepingly described as “any
other financial instrument.”

The ownership interests that the secretary is now going to purchase in
financially healthy banks are being purchased under this “any other
financial instrument” clause.

…….

Treasury Spokesperson Zuccarelli said that according to the law,
Treasury is required to keep the taxpayer’s best interests at heart.

“We are going to have to consider the taxpayer’s interest at all
times,” she said. “We are going to have to consider the health of the
(financial) institution, and if it’s not in the taxpayer’s interest to
hold them, that’s something we’re going to have to keep in mind.”

…….

All original CNSNews.com material, copyright 1998-2008
Cybercast News Service. Reprinted here with permission from CNSNews.
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Questions

1. Under the federal government’s financial bailout plan, from how many major banks will the U.S. government buy shares?

2. Until what date is the U.S. Treasury allowed to purchase bank stocks?

3. a) When can companies buy their shares back from the government, according to the guidelines issued by the Treasury Department?
b) How much would a bank have to pay to buy back their stocks from the Treasury Department?

4. When the $700 billion government bailout plan was proposed, and then passed into law, how were people led to believe the money would be used?

5. What did Treasury Spokesperson Jennifer Zuccarelli say will determine when the Treasury sells stocks back to the banks?

6. Are you confident that the federal government will do what is best for taxpayers? Explain your answer.

 


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