Paulson's actions smack of "gangsterism"

As reported in the New York Times today, the chief executives of the nine largest banks met at the Treasury Department to have a meeting with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

The executives were not told in advance the purpose of the meeting, but were stunned when handed a one-page document stating they would agree to sell shares to the US government in return for a portion of the first $250 billion of the $700 billion bailout.  Paulson let the executives know there was no option to negotiate.

Most of the executives were quiet and offered minimal response, but the CEOs of Wells Fargo (Richard M. Kovacevich) and Bank of America (Kenneth D. Lewis) pushed back, saying they had not been exposed to the toxic mortgages of their East Coast counterparts.  They stated they had no need for a bailout, and didn't want the government's money.

One problem though... the banks had no choice.  Paulson made it clear he expected the money to be taken.  Aaron Task of Yahoo! Tech Ticker said Paulson's actions smacked of "gangsterism" and seemed better suited to a scene out of The Godfather.

Eventually all the executives signed on to the plan, and as the NYT article stated, "as they [the bankers] heard more of the details, some of the bankers began to realize how attractive the program was for them."  Effectively the bankers are going to receive the funds at a sweetheart rate, better than they could receive by raising private capital on their own.

Since Merrill Lynch has been purchased by Bank of America, they can now take advantage of the new FDIC policies to benefit their institutions in ways that could never be done when they were solely an investment bank.

Sadly, we no longer live in a world where those who run their companies well are rewarded, and those who make bad decisions go out of businesses.  The Treasury Department and Federal Reserve are propping up failed businesses with taxpayer dollars, and in some cases giving funds to banks which have no financial problems at all, solely with the idea of getting banks to loan to each other. This approach will eventually fail miserably.