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Paulson: Bank capital plan is 'investment, not expenditure'

October 20, 2008 | 10:05 am

Treasury Secretary Henry M. Paulson insisted again today that the government’s $250-billion plan to inject capital into U.S. banks ultimately shouldn’t cost taxpayers a dime.

At a press briefing to provide more details on the application process for the capital program, Paulson also continued to put pressure on banks to ramp up lending instead of hoarding funds.

Banks that get capital under the program will issue to the Treasury preferred stock paying a 5% dividend yield for the first five years, and 9% thereafter.

Some highlights from Paulson’s comments:

Paulsonoct20 --On the payback for taxpayers: "This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything. They will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions."

--Why healthy banks should want to participate: "While many banks have suffered significant losses during this period of market turmoil, many others have plenty of capital to get through this period, but are not positioned to lend as widely as is necessary to support our economy. This program is designed to attract broad participation by healthy institutions and to do so in a way that attracts private capital to them as well."

"The terms for this program are the same for all institutions that apply before the capital purchase program deadline of November 14. Sufficient capital has been allocated so that all qualifying banks can participate. Let me be clear that this program is not being implemented on a first-come-first-served basis."

--On the capital-hoarding question: "Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital. And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people."

--On help for homeowners at risk of foreclosure: "We expect all participating banks to continue to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure."

--On disclosure of which banks are getting capital: "All transactions will be publicly announced within 48 hours of execution. We will not, however, announce any applications that are withdrawn or denied."

See the full statement here.

Photo: Treasury Secretary Henry M. Paulson at the press briefing today (Jay Mallin / Bloomberg News).

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