Government buying bank stocks, the right thing to do.

When congress passed the bail out law I was concerned. We, the government are not good at buying securities, yet alone bad ones, and we would be very poor mangers of them as is proven out by the governments management of the savings loan problems of resent history.

I was more pleased by the announcement that the government would be buying stock in banks. Stocks are easy to value, and are they are currently at reduced prices, we just might get a bargain.

When the purchase of stocks is used to infuse cash into a bank, the bank gets the capital to lend. They get it now, so it's fast. The banks should keep the bad securities, and manage them back to health and value. After all, underlying those securities is real estate for the most part, and the real value of the securities is some where between 6O% and 100% of the original cost. The problem is the accounting rules do not allow a bank to carry the securities at the estimated value, but rather at market value, of which there is none, thus they need an infusion of cash to be solvent.

Lets look at what happens when a bank sells stock. The bank gets cash to lend. The generally accepted accounting rules, cause the bank's balance sheet to show the cash as a double positive, cash on hand and increased paid in stock value*. The current share holders get diluted, as they should for allowing the banks managers to get into trouble. When this crises is over with, the government can sell the stock on the open market or back to the banks. The treasury gets back their money at a profit I think, and the tax payer gets out of the banking business.

The best way to save our financial system is to buy stocks or make loans at a high interest rate. It is not to buy bad securities and try to manage them, If they where easy to manage there would be a market for them.

Well that's the non-economist view. And yours?

*(The reverse is true when a bank buys back stock.)