As it turned out, he decided to have a private meeting on October 13 with the leaders of the nine largest banks.
Each received a one-page document that said they agreed to sell shares to the government...and they were asked to sign it before they left the room!
The chairman of JPMorgan Chase said he thought the deal looked pretty good. The chairman of Wells Fargo protested strongly. He said his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout.
At the conclusion of this 3 1/2 hour meeting, all nine chief executives signed. This put in motion the largest government intervention in the American banking system since the Great Depression.
Paulson presented his case in blunt terms. The nation's largest banks needed to begin lending to each other for the good of the financial system. To do that, they needed to be better capitalized.
Paulson was well aware of the stakes. If you look at the worst performing stocks last year, you'll see that all but one (ie, Circuit City) was a financial company.
Paulson's plea was that for the good of the country, these nine major banks needed to take the money. Paulson didn't have any particular terms for the use of the money. He simply wanted to see their balance sheets strengthened.
After dishing out $125 billion, he could then go to the mid-tier banks and ask them to accept money, too, in exchange for non-voting stock ownership by the US government, and other constraints on their business.
Did it work? Did this achieve Paulson's goal of stabilizing the banking system--and therefore averting collapse? Well, yes, it did. This is in part why were are seeing a bit of recovery in the US financial system, albeit it in the very, very, very early stages.
Following is a chart of the bank failure last year as compared to failures over the last four decades.
No comments:
Post a Comment