ML-Implode News - Treasury Has No Authority to Coerce the Banks

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?

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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.

Treasury Secretary Hank Paulson was quoted by Bloomberg on Tuesday as saying that "leaving businesses and consumers without access to financing is totally unacceptable." Actually, it is perfectly acceptable to leave certain businesses and consumers without access to credit. Everyone understands that we would be a lot better off today if the market had denied mortgage credit to many subprime borrowers. Can federal direction as to which businesses and which consumers banks must serve be far behind -- even if not from this Treasury Secretary, then from his successor, or from elsewhere in the federal government?

Stunning to see this admission in print from former Fed governor Poole.

Also see this piece from the Chicago Tribune:

And yet, Paulson has launched the bank bailout program with a reverse kind of logic. In lending billions of dollars merely so some banks can try to keep up appearances, he has miscalculated on a number of fronts.

For starters, a bank truly at risk of failure would readily accept federal cash. When Warren Buffett showed up with $5 billion, nobody at Goldman Sachs refused help for fear of damaging the firm's reputation. Why would federal funds be any different?

Indeed, maybe they just should have stayed the hell out of the way. Was the Fed lending "infinity" in short-term cash not enough to buy troubled banks time to raise permanent capital -- privately?

Relevant:

Treasury Has No Authority to Coerce the Banks