WASHINGTON-With last week's actions, the government has extended itself so far into every corner of financial services-investing directly in banks, buying unlimited amounts of commercial paper; and guaranteeing bank debt, interbank funding, and all noninterest-bearing deposits-that many observers said any eventual unwinding of the interventions would be so complex that some parts may never go away.
The degree to which the government's intervention will affect credit unions remains unknown.
Even regulators acknowledged that some elements - such as the Federal Deposit Insurance Corp.'s decision to back bank debt-could be particularly difficult to reverse.
"Once you've done it, it's hard to roll back," Comptroller of the Currency John Dugan said in an interview. "If things calm down and there is more confidence, the question is: Will the government fail to step back from the guarantees, or will that act in and of itself create the kind of risk that requires the government to be there in the first place?"
Former regulators, academics, and industry representatives said that although many top officials claim the expanded programs will be targeted and temporary, government intervention in the markets is unlikely to go away anytime soon.
"They don't have a very good exit strategy," said Richard Herring, a professor of international banking at the Wharton School. "They've gone in massively, but it's not at all clear how you back away, and that has been the history in all the countries that have tried this out. They make all these guarantees, and there is sort of never quite the right time to remove them."
Individually, many pieces of the plan have deadlines and withdrawal strategies. But observers said the sweeping nature of the intervention left those deadlines in doubt and expressed concerns about whether the strategies would work.
Ultimately, the decision to offer $250 billion of equity stakes to banks and thrifts may be the least complicated decision to undo-though several analysts still raised concerns.
Under the plan, the Treasury Department would take positions in senior preferred stock of selected banks for three years. Then the banks may redeem the Treasury's shares at the whole price, plus any accrued and unpaid dividends. After five years, the Treasury's dividends are to rise to 9%, from 5%, making it more costly for the shares to remain outstanding and encouraging their redemption.
Dugan, for one, said this would work to let the government back away from directly holding stock in institutions.
"On the capital injections, you have a trigger at three years. It becomes less attractive to own the stock as the coupon rate jumps up, and at that moment you can redeem the stock without having to commit to replace it with Tier 1 equity," he said. "That's kind of a natural place for the stock to be redeemed, and people may have an incentive to do so at that time. The stock was designed with those thoughts in mind."
But others were not so sure. Chris Low, the chief economist at First Horizon National Corp.'s FTN Capital Financial, said that, unless private equity is ready to return to the market within three years, the government will not be able to withdraw.
"It depends on how quickly the market recovers," he said. "The assumption is that private capital will follow government capital into the banking system now that investors have been reassured that it's safe, but there's no indication that will be the case."
