UAB Expert Commentary - Bank Bailouts Could Fail Financial System

The U.S. Treasury announced plans Tuesday to buy up stocks in the country’s nine largest financial institutions at a cap of $25 billion dollars each, according to a report from CNBC.com. The stock-buyout money comes from the $700 billion approved recently by Congress as part of a financial bailout package.

 

October 14, 2008

•  Bank bailout no guarantee
•  Bailout money must be invested
•  Andreas Rauterkus available today, Oct. 14, 11 a.m. – 12 p.m. and 2 – 4 p.m.

 

BIRMINGHAM, Ala. - The U.S. Treasury announced plans Tuesday to buy up stocks in the country's nine largest financial institutions at a cap of $25 billion dollars each, according to a report from CNBC.com.  The stock-buyout money comes from the $700 billion approved recently by Congress as part of a financial bailout package.  

UAB assistant professor of Finance Andreas Rauterkus, Ph.D., said the plan is aimed at freeing up cash within the country's biggest banks to jump-start new lending and credit allowances.  The ongoing financial crisis has led to credit freeze, keeping needed funds from many of the country's small businesses and others.

"In his comments today, Treasury Secretary Paulson said it was his hope that the banks would use money to make new loans, but those companies still have the legal right to do whatever they want with the government's money," Rauterkus said.

And that is the reservation experts like Rauterkus have about the plan.  He said that if loans and credit aren't extended in the days and weeks after the government's bank stock buyouts, then the massive plan would be a failure.

"If the banks keep this money and save it for a raining day, this bailout plan will have no impact, because credit would still be frozen," Rauterkus said.  "It must be invested and given out in the form of personal and business loans to have a positive economic effect."