White House: 'We'll Just Trust Our Treasury Secretary' on Financial Bailout

October 23, 2008 - 6:29 PM
The Department of the Treasury is set to buy $250 billion in stock in nine major banks and hundreds of smaller banks across America, with no timeline as to when (or if) those stocks will be sold back to the private sector.<br />

Treasury Secretary Henry Paulson (AP Photo)

White House (CNSNews.com) – The Department of the Treasury is set to buy $250 billion in stock in nine major banks and hundreds of smaller banks across America, with no timeline as to when (or if) those stocks will be sold back to the private sector.
 
While banks are not allowed to buy the stocks back for another three years, under the Emergency Economic Stabilization Act of 2008 signed by President Bush this month, the treasury secretary has full discretion on when (and whether) to sell the bank shares.
 
Treasury Secretary Henry Paulson plans to leave his post in January 2009, at the end of the Bush administration. A new secretary will come in with the new administration.
 
Asked if Bush thinks there should be a timeline or incentive for a future administration to sell the shares back into the private sector, White House Press Secretary Dana Perino said the Treasury Department is entrusted with the matter. 
 
“The president is trusting his team at the Treasury Department to design this program, and he believes they are doing it the right way,” Perino told CNSNews.com at Thursday’s press briefing. “I don’t have details for you on it.  So, we'll let them--we’ll just trust our treasury secretary and those he's tasked with to implement the program.”
 
While Bush previously said he was reluctant to support the $700 billion financial bailout, which includes $250 billion for the bank-stock buy, it is unlikely that a Democratic president would be reluctant to use his authority with the bank stocks to influence the economy, said John Berlau, director of entrepreneurship at the Competitive Enterprise Institute, a free-market think tank.
 
This is a particular concern if Democrat Barack Obama, who is leading Republican John McCain in most polls, is elected president, Berlau said.
 
“There are already calls of, ‘Why don’t you have voting shares?’” Berlau, already a critic of the bailout, told CNSNews.com. “This is being handed over to the Barack Obama administration. He could change things with the stroke of a pen. We could see voting shares. We could see granting certain loans to political allies. It’s socialism bordering on communism.”
 
The law prohibits further purchases of bank stocks after Dec. 31, 2009, but it does not say that the stocks bought by Treasury now or throughout 2009 must be sold back. Further, Congress could pass other legislation allowing for more bank-stock purchases by the federal government.
 
Earlier this week, Treasury Department spokeswoman Jennifer Zuccarelli told CNSNews.com, “It would be (left) up to the government’s discretion as to when they would want to sell it (private assets) back. … We can hold them for as long as we want.”
 
Under the Treasury program, the government will buy up to $250 billion of “senior preferred shares,” in several U.S.-controlled banks, savings-and-loans and other institutions.
 
The stock held by the Treasury will be required to pay dividends to the government at the rate of five percent for five years, a figure that is set to rise after five years to nine percent, according to guidelines. Companies cannot buy their shares back for three years, unless they raise 25 percent of the shares’ value in private capital.

The stock “may not be redeemed (repurchased) for a period of three years from the date of this investment, except with the proceeds” from the sale of assets “which results in aggregate gross proceeds of not less than 25 percent of the issue price (of the stocks),” the guidelines state.
 
The law says: “The Secretary (of the Treasury) is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation, the following: … In order to provide the Secretary with the flexibility to manage troubled assets in a manner designed to minimize cost to the taxpayers … to purchase, hold, and sell troubled assets and issue obligations.”

The actual language of the law authorized the secretary not only to purchase mortgages and mortgage securities but also what was sweepingly described as “any other financial instrument.”
 
CNSNews.com correspondents Matt Cover and Jane O’Brien contributed to the reporting of this story.