1. About the bank shares that the govt is buying, are these new shares that the banks are just issuing?If they were not new issues, l do not understand how just buying existing shares from somebody else gives the banks more capital.

2.Is the govt paying a premium over the market price for the stocks they are buying to help prop up the share prices?Or are these some new esoteric share class just now being created so that there is no going market price set for them?If so, how can they be priced fairly?

They r new shares issued by the bank. They r not some esoteric share class, but preferred shares. Many companies have preferred shares which r owned by other investors, not just by government entities.

You r correct that purchasing shares from somebody else will not give any additional capital to the bank.

To determine the fair price is a difficult proposition. As comparison Berkshire-Hathaway bought preferred shares in GS (which the government also bought). Berkshire got terms of 10% interest per year the shares can be called by GS (the company can force Berkshire to sell them back to the company) for a 10% premium. The government will receive 5% for 5 years then 9% after that. In addition they have received warrants to receive additional equity in the bank if they do not repurchase the shares from the government. So the government is not getting as much money for its investment, but they were also able to put stipulations on what the company could & could not do (i.e. executive pay, no share buybacks). Plus u should keep in mind the the ultimate primary goal & motivation of the government is not return on investment, but restoring the currently dysfunctional credit market. Personally l think that the government is getting a fair return for its investment, properly valuing its return on the investment without terms which could further slow the recovery of the worlds financial system.

Although details r sketchy, this is my understanding of the bailout.

The government is both loaning the banks money as well as getting a stake in the banks. The government will be getting newly issued preferred shares that has a face value at the amount of the purchase that will pay 5% annual interest rate for 5 years & 9% after 5 years. At anytime after 3 years, the banks can redeem the preferred shares (expected to be 3-5 years) by paying the face value (original price) back to the government.

The government will also receive warrants valued at 15% of the value of the investment which later can be converted to common shares at a specified date & price. This is the way that the government can make a decent profit if the price of the stock of the company rises significantly in the next few years.

The government will also guarantee all of the banks newly issued debt (commercial paper) for the next three years.

The bailout is similar to recent investments in Goldman Sachs & GE by Warren Buffet. The major difference is that Buffets investments carry a 10% interest rate on the preferred shares & when the preferred shares r redeemed, warrants r issued equaling 100% of the value of the investment can be used to purchase common shares at a specific date & price in the future. The price of the common stock is about 20% greater than price when the investment is made & nothing will be lost by Buffet if the stock does not hit the strike price but he potientially will make a large amount of money if it vastly exceeds the strike price. It is unknown what the strike price for the government is for the banks common stock.