Wednesday, February 18, 2009

Extorting Socialism

I was talking with a banker friend of mine today about the “bailout” of the financial markets. I learned a few things. For instance, it’s not enough that Capital Hill financiers are creating enormous welfare programs for banks of a certain size in this country. It’s not enough that they are flirting with nationalization of some banks to prop them up. Because Capital Hill has both the funding and the legal authority to do so, it is not only providing funds for banks – it is forcing banks to take those funds or the FDIC will not guarantee the banks because it assumes the banks are insolvent and will not be operating in a year. So banks like TCF Financial, Wells Fargo and US Bank, which didn’t really even need the TARP funds, are getting them because Capital Hill is forcing them to take it if they want to retain their FDIC insurance.

Further, Capital Hill isn’t content with forcing banks to take loans. The structure of the transaction is in the form of preferred non-voting stock. In essence, the federal government is buying non-voting ownership in these banks at a preferred rate of return beginning in two years.

So let me get this straight. The federal government is forcing banks to take its money in return for insurance protection, then forcing banks to pay the money back in two years at a higher rate of return than other shareholders get. Sounds suspiciously like a protection racket.

And the Don lives at 1600 Pennsylvania Avenue.

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