In an effort to get capital flowing from the government’s $750 billion bailout plan, Secretary of the Treasury Henry Paulson called together the executives of nine of the country’s largest banks for a meeting in Washington.He announced his plan for the government to buy up a number of shares from each bank. The government is also planning to guarantee and insure more commercial debts and deposits.
Is it a $250 billion band-aid? Perhaps.
According to the plan, the more capital a bank has and the more secure it perceives certain risks to be, the more growth is facilitated. If the market for credit grinds to a halt because institutions are not lending or because they choose to hoard their resources, the more likely the economy will remain stagnant.
"I don’t think there was any banker in that room who was going to look us in the eye and say they had too much capital," Mr. Paulson says in a phone interview with The New York Times in reference to Monday’s meeting with bank executives.
Some of the institutions represent at the meeting are suffering more seriously than others from the current sub-prime mortgage situation. Executives from the less-affected banks reportedly objected to the new plan initially. Others disapproved of the new guidelines related to executive compensation packages.
Ultimately, in a matter of just a few hours, all nine banks had signed on to the agreement. The effects of the deal are unlikely to be seen immediately, however, because it will take time for the newly injected capital to translate into more accessible credit and more growth.
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--Bridget O'Sullivan
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