Uncle Sam Wants To Own Your Bank, And Your House

The latest in a very long list of government proposals to save the world is the most radical. Congress would create a mechanism to sweep the so-called toxic assets of banks, brokers, and insurance companies into one huge fund controlled by a new entity or some division of the Treasury.

This cesspool would come with a checking account to send money back to the banks for their troubled paper.Eventually, these assets would be sold back into the market. This is the stuff of which vulture funds are made, so there will be a ready market. But, the assets will have to be sold at a significant discount to their original values.

While the financial branches of the government have turned sharply toward socialism, it is in the name of preventing a new version of The Great Depression. Even taxpayers who will have to pay for this gamble would rather face higher payroll deductions than having to live in Hoovervilles on the edge of town.

While the government is sending out cash to financial companies and getting something no more valuable than wallpaper in return, one proposal from Congress for balancing this transaction is that the Fed would end up owning some equity in each bank that the system helped. It seems only reasonable for the government to receive compensation for the tremendous service being rendered.

The Fed would end up with a portfolio of bank stocks. As bad paper is moved off the balance sheets of these banks, their market values will increase and the government could make back its money. People with large checking account balances may walk into their local branches and find Paulson or Bernanke at the teller window filling in for someone who has gone on vacation.

By owning toxic paper, the government would have a number of shaky mortgages, some of which have gone into default. That would make the Treasury or a related federal entity the largest homeowner in the country. In terms of its new equity interest in the banks it will have saved, the government will own a percentage of the mortgages held by those institutions as well.

Homeowners should not be startled if they return from work one day and find an assistant undersecretary of The Treasury mowing the lawn. They will have equity in the place so keeping up its value will be extremely important.

Douglas A. McIntyre