Oct
15

Paulson Lacks Leverage to Compel Banks to Put New Cash to Work

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October 15, 2008

By Robert Schmidt and Rebecca Christie – Bloomberg

Treasury Secretary Henry Paulson persuaded nine major U.S. banks to accept $125 billion in government investment. Getting them to lend it out may prove a tougher sell.

The equity stakes the government is purchasing in Citigroup Inc., Morgan Stanley and seven other big institutions come with no guarantee that the investments will spur lending and unfreeze credit markets. Nor do they give the government board seats or any other leverage to demand that that the firms actually use the money to help the economy.

“The truth of the matter is, they can’t put a gun to their head and say you have to lend this money,” said Charles Horn, a former official at the Office of the Comptroller of the Currency, part of the Treasury Department, and now a partner at the Mayer Brown law firm in Washington.

Treasury officials acknowledge they can’t force banks to get the taxpayer money into the hands of their customers. Instead, officials are betting that the government’s investment will create conditions where banks have a greater incentive to earn profits from lending than to hoard money to shore up their balance sheets.

“It’s in their economic interest,” said David Nason, the Treasury’s assistant secretary for financial institutions, in an interview with Bloomberg Television. “When you give them a stronger capital position and you also provide a certain amount of government backstop to their funding sources, it’s incumbent upon them to go out and continue to lend.”

ARTICLE SHORTENED DUE TO LENGTH….

LINK TO ARTICLE HERE:

http://www.bloomberg.com/apps/news?pid=20601103&sid=amZ3uCIUB8GQ&refer=news
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