The plan drawn up by Treasury clearly envisions the government selling the stock back to the banks. It also hedges against elected officials using government ownership of the banks for their own political advantage by giving oversight over these stocks to the federal bank-regulating agencies: the Office of Thrift Supervision; the Office of the Comptroller of the Currency; the Federal Reserve; and the Federal Deposit Insurance Corp.
According to the details published by Treasury last week, a bank (a "qualified financial institution" or QFI in the lingo of the plan) can seek to buy its shares back from the government in the first three years of the plan if it can raise 25 percent of the value of the shares by selling stock elsewhere. After three years, a bank can opt to buy back its shares at any time. But all stock buy-back decisions, before and after three years, "shall be subject to the approval of the QFI's primary federal bank regulator."
Giving federal regulators the power to approve or disapprove a bank's decision to buy back its own stock is not unique to the bailout deal. In all circumstances, a bank must get approval from federal bank regulators before it can make a significant expenditure that would reduce its capital.
The regulatory agencies will make their decisions based on judgment calls about the financial safety and soundness of particular banks.
But the bottom line is that banks are not guaranteed they can buy back their stock.
The Treasury plan, meanwhile, creates at least two incentives for elected officials -- and their appointees -- to seek to maintain government ownership in the banks. First, the banks the government takes ownership in must follow government rules controlling compensation for top executives. Secondly, the banks must pay the government a 5 percent annual dividend for the first five years and a 9 percent dividend "thereafter."
That means that the $250 billion in bank shares Secretary Paulson plans to buy now will initially pay the Treasury $12.5 billion in annual dividends before ballooning to $22.5 billion in late 2013.
Three years from now, the season will be ripe for banks to begin trying to buy back stock. The political season will also be ripe. Early presidential primaries, and a new congressional election year, will loom. The resilient American economy may be on an upswing then -- no matter what politicians do to it the meantime.
And some incumbents may be tempted to legislate and campaign, saying: We saved the economy by bringing to heel the greedy bankers who caused the financial crisis of 2008. So, we are going to keep the government's shares in the banks and use the $22.5 billion in annual dividends to cut taxes for everybody who makes less money than Joe the Plumber.