The Treasury Department formally announced that it will buy $250 Billion in preferred stock about half of which will go to 8 major financial institutions. The times has a more detailed article here. The eight major banks that have "agreed to participate," Bank of America, Citigroup, JP Morgan Chase, Morgan Stanley, Goldman Sachs, Bank of New York, and State Street all pretty much had no choice. Paulson brought them in and put the screws to them.
Banks that didn't really want to participate, like Bank of America and Wells Fargo had to participate or it would look like the government was "singling out" the weaker banks. While this looks like the financial equivalent of having to give everyone in your second grade class a valentine so no one's feelings get hurt, the stakes are much higher than that. It's much more akin to the national geographic channel, with Citigroup and Morgan Stanley playing the part of an injured ewe seeking safety in the flock lest they appear weak the wolves of Wall Street.
Brad DeLong seems pleased with the deal, although he has some reservations with the concept of buying preferred shares rather than voting common stock. Quick note: preferred shares get paid first, so they're more secure, but they don't vote. Theoretically, if a bank had $10 Billion in preferred shares outstanding, with another $10 Billion in common stock, if the bank is worth only $10 Billion, that's a big problem. If it was sold, only preferred shareholders would get money, but the people who decide whether or not to sell are the common stock holders, who get $0. Thus the "Zombie Bank" problem Brad mentions, where the people running the bank have nothing to lose by keeping it running to maybe make a profit eventually, even if it would be way smarter just to sell it today.
Image from New York Times here (see sidebar) used without permission.
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