Stock-Injection Plan for Implementing Bailout

I was listening to This American Life on NPR and while they were explaining the bailout and the economic perfect storm the lead to the meltdown, they mentioned a couple of different ways the bailout could be implemented. The Paulson plan is that the US Government basically buys all the garbage securities from the companies that made the bad loans.

With the Paulson plan, the taxpayer ends up owning toxic assets of questionable value. If the mortgages bundled into these securities default, then the taxpayer is on the hook.

Alternatively, under the Stock-Injection Plan implementation, the Government would end up owning part of the company, similar to what happened with the AIG bailout:

Instead of just taking toxic assets off of banks' books, the U.S. government would directly inject capital into ailing firms. In return, the government — and taxpayers — would get an ownership share in the firms equal to the amount of their investment. "The taxpayers, the government become stockholders and owners of the banks," Davidson says.

How is that better? First of all, it's simply easier, because it avoids trying to find the right price for mortgage-backed securities whose value is impossible to pin down at the moment, Davidson explains. If you give $10 billion to a bank, you get a $10 billion share.

Even better, the stock owned by the US Government (and us citizens) would be preferred stock, meaning we'd be first in line to be repaid.

Not suprisingly, the biggest opponents to that implementation are the banks themselves. They saw what happened at AIG:

When the government took over insurance giant AIG, it essentially bought a huge share of the bank's shares and zeroed them out. All the shareholders lost billions of dollars and the chief executive of AIG was fired to boot.

Astonishingly, the text allowing for the Stock-Injection version of bailout implementation made it into the law that GWB signed, so it's up to the Treasury Secretary which way to go when dealing with a failing bank.

I really just want to know why the only place I hear them discussing this is on NPR?

Link to NPR story (and podcast): [NPR.org]