Paulson Moved to Protect Chinese Investors While Hurting Hundreds of U.S. Community Banks
September 24th, 2008
In the recent, unexpected move to nationalize mortgage giants Fannie Mae and Freddie Mac, Treasury Secretary Paulson made an unexpected extra effort to protect several billion dollars in lower level debt that would not normally be protected under such circumstances. This debt was held by foreign, largely Chinese investors. Meanwhile hundreds of small community banks, some already battered by the real estate crisis, lost $10 to $15 billion in preferred stock of the two, according to The Wall Street Journal.
Banks must legally keep a certain percent of their assets in “safe” reserve to protect themselves from loan loss. Many small, community banks invested in Fannie Mae and Freddie Mac preferred shares in order to meet this requirement. These are not Wall Street bigwigs, but smaller banks that are the backbone of local communities across the nation. It was a generally accepted, even encouraged, policy to have them invest in these supposedly government guaranteed entities.
The fact is Paulson personally stepped in to include the government safety net over bonds owned by Chinese investors, while causing a heavy blow to hundreds of small banks. If the takeover had been structured like the AIG bailout, the preferred shareholders like these small banks would have been protected, but inexplicably Paulson basically wiped out the value of these assets while personally protecting foreign bondholders.
Most of these banks will survive, but the best case scenario is they will reduce local lending just when the economy needs it most. The worst case, probably for dozens, is that they will not be able to survive this blow on top of other recent losses, like the real estate crisis. For instance, if a bank loaned to several local home building companies that have since gone out of business, they would already be in a weakened state.
I can only guess why Paulson would value protecting Chinese investors over our own small banks, but no scenario imaginable is positive. He must go.
Todd Lipscomb
Founder of http://madeinusaforever.com/index.html, your source for American-made US products.
Wednesday, September 24th, 2008 at 6:48 pmand is filed under Uncategorized.
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