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June 23, 2024

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Treasury Looking to Bail out Banks

POSTED: October 09, 2008, 12:00 am

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In the latest sign of the nation’s economic crisis the Treasury Department is reportedly considering a plan to take an ownership stake in faltering U.S. banks. This move comes on top of a less than favorable market reaction to the recently enacted $700 billon mortgage bailout approved by Congress and signed by President Bush. Despite the efforts of the White House to paint the plan as a critical step toward stabilizing the economy, investor reaction has been negative as there is a growing belief that the package will do little to stem the present economic freefall.

The last month has been one of remarkable change in the nation’s economy and its international stature. With the collapse of one Wall Street investment house - Lehman Brothers – that was precede by the federal rescue of another, Bear Stearns, the sale of Merrill Lynch to Bank of America, the federal bailout of American International Group (AIG), the collapse of Washington Mutual Bank and the impending sale of Wachovia, topped by the ongoing implosion of the mortgage market; the nation is experiencing a defining moment in its history and one that will determine its future standing in the global economy.

What has become apparent is that the American public – taxpayers and homeowners – have lost confidence in the nation’s leadership and are now panicked over their present economic circumstances as well as their long-term economic security. For many Americans, a home, the one asset that was counted as their principal investment and vehicle to transfer wealth, has lost significant value and for many is now in jeopardy of being foreclosed.

The current downturn has hit Black Americans particularly hard. With many Blacks being first time homeowners and the prime recipient of subprime loans, Black families are now in danger of not only losing their homes but regressing financially as children of homeowners who are foreclosed will not gain the value of that inheritance. To make matters worse, last month’s unemployment data from the Bureau of Labor Statistics revealed that Blacks are being significantly impacted by job losses, with Black unemployment highest among all groups. The double whammy of unemployment and mortgage instability will have a profound impact upon the economic standing of Black Americans.

While the recently passed mortgage bailout package offers some residual benefits to individual homeowners, citizens’ confidence in the nation’s financial system is fleeting. It was one of the concerns raised by members of the Congressional Black Caucus (CBC) during the recent negotiations over the bailout and their foundation’s Annual Legislative Conference two weeks ago. There was an overriding concern among some CBC members that the package would not reach deep enough and that thousands of Black homeowners would lose their properties no matter if the bailout plan was put into effect. It prompted several members of the Caucus to call for a moratorium on foreclosures to give homeowners an opportunity to restructure their debt.

The strategy the Treasury Department is reportedly considering would inject cash directly into banks that request such support. In exchange, Treasury officials believe the bailout law gives the department the right to take an ownership stake in banks, even ones that for the time being are considered financially sound. At the present the talk in Washington seems to suggest that the program would be voluntary and would not be imposed on financial institutions. The British government has already announced a similar plan, offering banks capital in exchange for shares of the institution while also guaranteeing a specified amount to help them refinance their debt.

With credit tightening, and banks unwilling to lend money to consumers and each other, the Treasury Department appears to recognize that a banking crisis is imminent. While the stability of investment banks and brokerage houses provides a level of security to investors, the stability of commercial banks is what concerns most Americans whose deposits represent their primary savings. As was witnessed with the collapse of IndyMac Bank over the summer, the simple news of financial instability could trigger a run on a bank as anxious depositors demand their money. It was one of the reasons a temporary provision that increases FDIC insurance on deposits from $100,000 to $250,000 was included in the bailout legislation.

This latest move out of the Treasury Department comes on the same day the Federal Reserve Bank and the central banks of five other nations announced a coordinated cut in the interest rate by one-half percentage point. It was the first time in history the Federal Reserve issued a cut in coordination with another country’s central bank. Also, the Bank of England announced it would nationalize part of the country’s banking system and provide almost a half billion dollars to guarantee transactions between banks.

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