Friday, April 10, 2009

Flashback: Treasury Capital Crowds out Private Capital

It is reported that Goldman Sachs will issue common stock to repay their TARP loan.

It is neither a coincidence nor a surprise that Goldman issues shares at the same time that they repay their TARP money. I explained last fall how Treasury "capital injections" just result in greater payments to bank industry shareholders. One (of many ways) it could work is that a bank receiving TARP money would either buy back its shares (or buy, for cash, shares of competitors), or use the Treasury funds to forestall raising new capital that (thanks to the recession and housing crash) would have been necessary.

The same argument implies that payments from a bank TO the Treasury would reduce payments from banks to bank industry shareholders (or increase payments from shareholders to the banking industry). That's what we see with Goldman's new issue.

Politicians told us that TARP money was actually going to be lent to bank customers, rather than paid to shareholders -- they were wrong.

For more examples, see my posts under the "bailout" label.

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