The capital‐infusion program would be voluntary for the banks wanting to raise new capital this way. This approach was the right way to go. It promised to use federal resources in an effective and relatively market‐friendly way.
But we’ve since learned from press reports, including in this newspaper, that the program was not quite so voluntary for nine of the nation’s largest banks. The day before the government announced its new program, the heads of these banks apparently “volunteered” to sign up the way a soldier is “volunteered” for latrine duty. “Yes sir, sergeant, right away, sir.”
To my knowledge, there is no statute that permits the U.S. government to require that a corporation sell stock to the government. Is Treasury so panicked by the financial crisis that it is willing to abandon normal democratic processes, such as acting under statutory powers?
The sad thing is that there is no need to strong‐arm large banks; indeed, this tactic adds risk to the financial stabilization effort. Treasury’s argument, as I understand it, is that it needs to require some participation in the capital‐infusion program to avoid stigma. Because participation carries terms objectionable to banks, such as limits on executive compensation, only weak banks will want to participate willingly. If some banks participated and others did not, those who did would be in effect declaring they were weak and scaring away depositors and investors.
The stigma argument does carry some weight. But the way to deal with it is for participating banks to raise private capital as well as Treasury capital — so that they can demonstrate that they are unquestionably solvent and strong. One way to demonstrate strength would be to hold capital clearly in excess of the regulatory minimum.
One risk posed by Treasury’s less‐than‐voluntary approach: What if a courageous board of directors of one of the nine large banks doesn’t agree to sell stock to the Treasury, despite the CEO’s promise? After all, a board should be more than a rubber stamp for the CEO. What if a stockholder suit blocks a bank’s participation? Then what? Would Treasury apply further turns of the extralegal screw to the recalcitrant bank?
If a bank hangs tough, we have some very rough times immediately ahead. If no bank resists, we have some tough times ahead for the longer run, because, large bank or small, the federal government is now beginning to walk down the path of credit allocation.