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Written by Becky   
Wednesday, 24 September 2008

Recently the government has taken over 3 huge mortgage companies, Fannie Mae, Freddie Mac, and AIG. During the takeover process, they accumulated and are still accumulating stock in the company. Currently, Treasury Secretary Henry Paulson, is asking for Congressional approval to spend almost $700 billion to buy troubled assets that are brining these and other companies down, hence causing more economical issues. Paulson rationalizes that, "We're doing this to protect the system, and it's about keeping credit flowing, protecting savings, making it possible to have car loans, student loans, mortgages,". Theoretically, doing so would give taxpayers a more healthy economy: the credit markets would open up again, and business would have more funds for their day-to-day expenses and payroll.

However, many lawmakers and other liked professionals, are worried that the supposed benefits would not reach the taxpayers, and that the taxpayers would be holding the majority of the risks associated with this venture. To try and prevent this, they want to add a provision to the legislative rescue action that allows the government warrants for stocks from the companies it buys problem assets from. Senator Jack Reed (D-RH) stated that, "Right now the price of admission [to the proposed Treasury program] is zero. It's not inappropriate to demand that if they benefit from this transaction in the future ... that they will share that benefit with the taxpayers who made the benefits possible,".

Those against the plan also argue that it is not geared towards helping individual companies. Paulson and Federal Reserve Chairman Ben Bernanke, feel that it is more aimed to help credit markets and investors. Bernanke commented that, "If we're dealing with going concerns, companies that are still operating and have reasonable business prospects, we don't want to threaten the companies with reducing their share value," . While participating in the plan is voluntary, Paulson is worried that having the companies give up stock, would lower the number of those able to participate, making it more difficult to maintain a competitive market. "The model you're looking at is the model where you go to people that absolutely need to sell and say, 'if you want to sell, give us something,' " .

As of yet, there are no firm details on how or what kinds of shares the government will be able to receive. They could get voting power or non-voting power. The equity stakes taken could range, AIG gave up 79.9% in return for the $85 billion bridge loan given by the Federal Reserve.



 
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