Bill Poole calls Treasury capital injections unconstitutional

Recently, the U.S. Treasury forced government capital injections onto nine U.S. financial institutions (JPMorgan Chase, Bank of America, Bank of New York Mellon, Citigroup, Wachovia, Goldman Sachs, Merrill Lynch and Morgan Stanley). While many observers welcome the recapitalizing of the U.S. banking system, many have expressed outrage that the Treasury mandated the injections whether the firms wanted them or not. Rumor has it that Jamie Dimon of JPMorgan Chase was especially displeased.

I was just listening to a conversation on Bloomberg Radio with former St. Louis Fed President William Poole. He was very plain-spoken, as is his way. He feels that Hank Paulson is making a mistake in how he has gone about injecting government capital into U.S. financial institutions. In fact, he called Paulson’s efforts “strong-arm” tactics. He also said that the tactics are “very distasteful and they will end up being counterproductive.”

In his harshest comment on the U.S. government’s move, he said the U.S. government does not have the “statutory authority” to force institutions to sell themselves to the Federal Government. In effect, he called the move unconstiutional.

While adding capital to better-capitalized institutions is admirable, I agree with Poole; forcing capital on banks is illegal and is further evidence that U.S. government officials are willing to do anything to get their way in this crisis. It sets a very bad precedent.