Sunday, the federal government signed the first paperwork to start disbursing part of the $700 Billion from the recent Wall Street Bailout bill.  This is the first ‘handout’ to the banking system, designed to stabilize the banks, and by extension the credit markets and larger economic markets.

The recapitalization of the banks should ‘hopefully’ alleviate the fear that these banks have of extending credit to other banks and businesses, and kick-start the industry back into action.

The initial amount of around $250 Billion, will go to the purchase of equity shares in 9 of the larger national banks. This gives the government an ownership interest in the banks, but not a controlling interest.

By taking the more direct route of recapitalizing U.S. banks, the Bush administration is following the lead of British Prime Minister Gordon Brown, who announced similar steps for British banks earlier.

Make Them an Offer They Can’t Refuse

Treasury Secretary Henry Paulson met with the banks earlier (Bank of America, Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, State Street and Wells Fargo.) to ‘convince’ them that this government ownership of stock was a good and necessary thing. With the financial situation the way it was, there wasn’t a whole list of other alternatives for increasing lender confidence.

Each of these banks will be receiving part of the $250 Billion, with the intent that they use the money for making new loans and getting the credit market unfrozen. While the government can’t necessarily force them to do this (as it doesn’t have a controlling interest), it’s likely that they will take this approach simply because they know that ‘big brother is watching’.

We’ll see.