On October 14, 2008, Treasury Secretary Paulson announced that the Treasury will purchase equity stakes in nine top American banks using the first $250 Billion that has been allocated to the TARP Program (See What is the TARP? And, why does it cost $700 Billion?) The nine banks agreeing to these investments by the Treasury are: Goldman Sachs, Morgan Stanley, JP Morgan Chase, Bank of America (including Merill Lynch), Citigroup, Wells Fargo, Bank of New York Mellon, and State Street Corp. These banks represent the most financially stable banks in the country as determined by the Treasury.

Why are they buying equity stakes in the banks instead of purchasing the troubled assets of the banks?

The econmic crisis has affected thebanking industry so adversely that many people have lost faith in the banks. In order to protect the banks, and restore confidence in the banking system, the government felt it had to make an equity investment in these banks.

The Bush adminstration is greatly conflicted by this decision. President Bush said that this sort of intervention (not seen in this country since the great depression) was “not intended to take over the free market but to preserve it.” Treasury Secretary Henry Paulson added, “We regret having to take these actions. Today’s actions are not what we ever wanted to do — but today’s actions are what we must do to restore confidence to our financial system.”

At a news conference President Bush said, “I’m sure there are some of my friends out there saying, I thought this guy was a market guy; what happened to him? Well, my first instinct wasn’t to lay out a huge government plan. My first instinct was to let the market work until I realized, upon being briefed by the experts, of how significant this problem became.” Paulson added, “Government owning a stake in any private U.S. company is objectionable to most Americans — me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”

The Treasury will also invest on other banks besides the original nine banks mentioned above. These banks will apply to the Treasury and will be picked based on a ratings system that will determine the strength and viability of these banks. The strongest and most viable banks will be the most likely recipients of these investments and weaker banks will be least likely. This may lead to these stronger banks purchasing the weaker banks which will also help the banking system by reducing the number of potential bank failures.

The Treasury has invested $125 Billion in the first nine banks listed above and will use the remaining $125 Billion to invest in the other banks.

Treasury Secretary Paulson believes the government will profit

On October 20, 2008, Paulson said, “This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything, This program is designed to attract broad participation by healthy institutions and to do so in a way that attracts private capital to them as well.”

Paulson added that this program was designed to increase the investors’ confidence in these banks and will also increase the confidence of the banks to start lending their money instead of hoarding it for reserves. This boost in investor confidence and increase in lending will increase the value of the banks and the equity stake help by the government.