EconInvestor

In reading the article “ Top Banks Got ‘Offer’ They Couldn’t Refuse “, it was disappointing to see in a country that promotes free enterprise that the top nine US banks were forced to have the government buy shares in their bank.

The idea was that if banks individually asked the government to buy shares in their banks, they would be seen as weak - causing flight by consumers and investors.  So, if the government bought into all the top banks, no one bank would stand out.

There are several problems with this policy.  First, if a bank pursued a better financial strategy than one that is in trouble, why should their shareholders have to have their shares diluted?  Second, the market discipline of failure is not being promoted.  Third, the Fannie Mae and Freddie Mac problems were well known prior to their failure. Political pressure was put on them to promote even riskier loans.  Once the government owns a share in the company - even if it is preferred, non-voting shares - what will stop the government from pressuring the banks to pursue certain political policies?

While the goals of the government are laudable, the policy to achieve those goals remains questionable.