When the U.S. Government announced bailouts for the nation’s banks many of us were stuck wondering things like:
- Why didn’t the airlines get a bailout?
- Are the auto-makers going to get a bailout, too?
- Why did only the large banks get a bailout?
- Why are are bailing the banks out? Doesn’t that just reinforce bad behavior?
- Why is the money of the tax-paying public being given to private banks?
- Will we ever see any of this money again?
Good questions, all, but the answer to one question may be the most foreboding.
The feds are apparently feigning concern over just handing out money to private banks, and are now backing a plan to use the remaining bailout money to buy up huge swaths of shares of the banks.
The argument as reported by MSNBC is that “Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.”
Excuse me? First, we’re talking about how to use the rest of the bailout money, not the money that’s already been spent via low-interest loans to these failing banks.
Just how would converting these loans into common shares help the bank out? While it’s possible that the banks hold some common stock, it’s more likely that the stock they hold is “treasury stock,” or stock that has been withheld by the company to prevent a potentially single investor from holding a majority share of the stock, and thereby having the ability to exercise control over the organization.
If it is treasury stock that the banks could be selling then, yes, this would give them an immediate infusion of cash – but since that cash will be used to pay back the loans plus interest, the net will be negative (as all interest-based loans are). But it will keep the bank from having to scrounge up revenues that could go to building the business from stagnating to pay back Uncle Sam. However, this will come at a HUGE cost to the bank. They will loose their treasury stock and likely control over the bank.
While it is possible, though unlikely, that these banks hold large amounts of common stock (the stock that you can buy using AmeriTrade, Charles Schwabb, E*Trade, or your preferred broker), it’s more likely that Uncle Sam will buy this common stock on the open market.
Buying common stock on the open market will drive up demand and could help boost the 401(k)’s of Americans who have diversified into these banks (only to have their funds frozen due to Black Tuesday restrictions by Retirement Fund custodians like Principal). It will also help foreign governments and foreign banks that have previously invested in U.S. banks.
Buying common stock won’t help the bank unless the bank holds its own common stock.
The bank already made their money on common stock when it went public during its Initial Public Offering (IPO).
A thinly veiled attempt
Buying bank stock is nothing more than a thinly veiled attempt at nationalizing or federalizing the largest U.S. banks, and by extension, the U.S. banking system.
By nationalizing the banks, instead of corrupt bankers running the banking system, we’ll have corrupt politicians running the banking system – or, rather, the people that corrupt politicians appoint to sit on the boards and oversight committees will be running the banking system.
These will be the same people that run the VA hospitals, the bankrupt Social Security Administration, the bankrupt U.S. Postal Service, the COMEX that can’t see price manipulation right under their noses, and, well, politicians in general.
Private shareholders will be powerless because the 800-pound gorilla will sit on every board of directors representing Uncle Sam’s interest as the majority shareholder under the guise of representing the will of the public.
A parallel in Venezuela?
Hugo Chávez, Presidential Dictator of Venezuela recently did the same thing in his country.
As soon as he assumed office in 1999 he had the current Constitution thrown out and a new one ratified which gave him more time in office, greater Presidential Powers, and even renamed the country (from “Venezuela” to “República Bolivariana de Venezuela”).
He nationalized the oil companies by military occupation of refineries, without compensation to the private owners (aka “theft by government order and military action”).
Once the people of Venezuela caught on to his plan they tried to throw him out – three times. Wikipedia details these:
Chávez survived the 2002 Venezuelan coup d’état attempt which briefly removed him from power.
A few months after the coup, on December 2, 2002, the Chávez presidency faced a two-month strike organized by management at the national oil company, Petlóleos de Venezuela S. A. (PDVSA) for the purpose of forcing Chávez out of office.
A further attempt to remove Chávez from office, the Venezuelan recall referendum, 2004, also failed.
But Chávez wasn’t satisfied with his power, so he began pushing for more Constitutional changes. He called for an end to presidential term limits (to set the stage for him becoming dictator for life). He proposed limiting central bank autonomy, or “nationalizing the banking system,” strengthening expropriation powers, and providing for public (aka “government”) control over international reserves.
Wait, “strengthening expropriation powers?” What does that mean?
Expropriation is the confiscation of private property with the stated purpose of establishing social equality. It’s a politically motivated and forceful redistribution of private property, taking wealth from the rich and giving it to the poor, or “spreading the wealth.”
Unlike eminent domain, expropriation takes place beyond legal systems and refers to socially-motivated confiscations of any property.
51% of the people voted down Chávez attempted power grab. A very narrow escape.
Does any of this sound familiar?
- “When you spread the wealth around it’s good for everybody”
- “A government-sponsored aggregator bank will buy up toxic assets”