A Government Bank Takeover Plan?

“The Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system.”

So reads the New York Times in the middle of the afternoon on Thursday. This was in advance of the rapid sell off that again came at the end of the trading day. Dow Jones…down…680 points!

Treasury Secretary Paulson made remarks to this effect on Wednesday and the possibility of this happening was supported by the White House before 2:00 PM Thursday afternoon.

This, of course, is a real confidence builder. But, the administration has become very adept at letting out clues that the system is falling apart. Two weeks ago, Fed Chairman Bernanke made allusions to the fact that the economy might not be around the next Monday. The whole Paulson Plan was based on the assumption that many financial institutions could not exist unless they had a “buyer of last resort” to put a floor under securities prices. And the good news just continues to come out.

No wonder the financial system is frozen. No one knows what institutions are going to fail…or be bailed out. Yet, the Treasury Secretary and the Fed Chairman continue to talk about how bad things are. Why should anyone lend to anyone else when there is no idea about who might not be able to pay back their loans. Still, we hear from these high officials that things are terribly bad!

And, these officials are the ones that supposedly have inside information on the condition of individual institutions!

What do these officials know that we don’t know?

These officials are not getting any sleep…but they really need to think through what they say. They may think that they are giving out information that will build confidence…but, the limited amount of information that is being given out only creates more distrust. The reason being is that market participants interpret what the officials are saying as an indication that there is more negative information known by the officials than they are telling. This leaves bankers and others adrift for they do not know who the negative information applies to.