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A dramatic shift in the Bush administration’s economic rescue to purchase preferred stock in the nation’s banks has received cautious approval from congressional leaders while sparking anger among some conservatives.
Democratic leaders praised Treasury Secretary Henry Paulson’s newest plan, which resembled an idea circulated on Capitol Hill earlier this month by billionaire financier George Soros. Under Paulson’s proposal, Treasury would invest $250 billion in banks to help them begin lending again and in return would receive preferred stock and warrants for common stock.
The investments would give the federal government as much as a 20 percent stake in the nation’s largest banks, although several experts said the ownership positions would likely end within a period of five years.
Some Republicans slammed Paulson for taking a major step toward socializing the American financial system.
“When a private asset is purchased by the government, it is an asset that has been socialized,” said Rep. Thaddeus McCotter (Mich.), chairman of the House Republican Policy Committee and a member of the Financial Services Committee.
But other GOP leaders said Tuesday that Paulson’s plan included safeguards against government control of banks because its stake would be in the form of non-voting shares.
“The government won’t be running the banks, but making an investment,” said House Republican Whip Roy Blunt (Mo.).
The split in the party comes as some members question the cost of bailing out banks that took costly risks. Some say the move calls to mind earlier government takeovers, such as Britain’s nationalization of its coal industry in the 1940s and its airline industry in the 1970s.
“It stinks,” said Andy Roth, the director of government affairs at the Club for Growth, a conservative advocacy group that promotes smaller government and lower taxes.
“What’s astonishing is that the administration is a Republican administration and their bedrock principle is supposed to be tax cuts. They’re picking socialism over pro-growth tax cuts. It shows how far we’ve come as a party.”
Democratic leaders applauded the move, whereby the federal government would buy $25 billion of preferred stock in Citigroup, Bank of America, JPMorgan Chase, and Wells Fargo, giving Uncle Sam between 15 percent and 55 percent of those firms’ shareholder equity. Treasury would buy $10 billion stakes in Goldman Sachs and Morgan Stanley. It would spend $125 billion for shares in thousands of smaller banks.
“After weeks of turmoil in the financial markets, I am pleased that the administration is now acting more aggressively to address this crisis,” said Senate Majority Leader Harry Reid (D-Nev.).
House Speaker Nancy Pelosi (D-Calif.) said that Democrats had first pushed for a direct injection of capital into the banking system through equity purchases but were rebuffed by Paulson.
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