US forcibly buys into banks

[Guest guest]

This article says some of the banks weren't interested, but the government forced them to take government funding. What I really don't like about this is that it is preferred stock. It makes no mention as to if they have a conversion ratio and when or if they will be sold. The article said more than 200 other banks and such have signed up for handouts.

This is deal is looking worse all the time. IMHO, they should have told Fedgov to go f*ck itself and just try muscling in, there'd be on heck of a lawsuit and publicity campaign against them.

http://online.wsj.com/article/SB122390023840728367.html?mod=djemalert

U.S. to Buy Stakes in Nation's Largest Banks

Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort

By DEBORAH SOLOMON, DAMIAN PALETTA, MICHAEL M. PHILLIPS and JON HILSENRATH

WASHINGTON -- The Bush administration is expected to take stakes in the nation's top financial institutions as part of a wide-ranging effort to restore confidence to the battered banking system, following similar moves by European governments that sent global stock markets soaring.

As part of its new plan, the government is set to buy preferred equity stakes in nine top financial institutions, according to people familiar with the situation. It's unclear how much would be invested in each institution. The move is designed to remove any stigma that might come with a government investment.

Banks receiving government funds include Goldman Sachs Group Inc., Stanley, J.P. Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Bank of New York Mellon.

Not all of the banks involved are happy with the move, but agreed under pressure from the government.

The new plan is designed to bolster bank balance sheets by providing new capital, removing rotten assets and taking new steps to make sure they have access to the funds they use to operate. All told, the moves are designed to get money flowing through the system so that banks will lend to companies, consumers and each other.

The initiatives, which will likely supersede many of the government's previous efforts, ensure that the U.S. banking sector will be tied to the federal government for years to come. They are being formulated jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.

One central plank of these new efforts is a plan for the Treasury to take approximately $250 billion in equity stakes in potentially thousands of banks, according to people familiar with the matter, using funds approved by Congress through the $700 billion bailout bill.

In addition, the FDIC is expected to temporarily extend its guarantee of bank deposits to include certain new funds raised by banks and thrifts for three years. That would be an aid to lenders that have had a hard time raising capital without government assistance.

Other moves could include temporary loan guarantees aimed at helping banks borrow the money they need to do business. Officials are still working through how such a plan would work.

All told, the program would put the guarantee of the government behind much of the plumbing of American financial markets, a step that would have appeared inconceivable a few months ago. But the seizure in credit markets and last week's plunging stock markets forced policy makers around the world to shift gears.

Monday, the big European powers -- the U.K., Germany, France, Spain and Italy -- provided further details of measures to buy stakes in struggling banks and offer lending guarantees. The U.K., which first formulated this plan, is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three big banks. The U.K. will also guarantee some £250 billion in bank debts with maturities of up to three years. The guarantees extend to the vast and frozen market for interbank lending, or short-term loans made among banks, a U.K. Treasury spokeswoman said.

The current planning in Washington would bring the U.S. in line with these countries.

Treasury Secretary Henry son has grown increasingly concerned about the worsening situation and wants to aim government dollars directly at bank balance sheets.

Details are still being finalized, but the equity-injection program is expected to be open to almost all banks, with a focus on getting the participation of the most important firms to financial system, according to people familiar with the matter.

While the Treasury wants to put money into banks, its main goal is to attract private capital. To make sure private investors aren't scared away, the Treasury is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants, these people said, a move that is designed to not hurt existing shareholders.

“These are tough times for our economies. Yet we can be confident that we can work our way through these challenges.†President Bush in a joint statement with Prime Minister Berlusconi of Italy

Mr. son called top U.S. banking heads to a meeting Monday in Washington, people familiar with the matter said. Expected to attend were executives including Ken , CEO of Bank of America; Dimon, CEO of J.P. Chase; Lloyd Blankfein, CEO of Goldman Sachs Group; Mack, CEO of Stanley; Vikram Pandit, CEO of Citigroup; and P. , CEO of Bank of New York Mellon.

Federal Reserve Bank of New York President Geithner remained in Washington Monday after spending part of Sunday huddled with senior officials at the Treasury Department to work out the latest plan.

The government's new focus is already raising questions about why it didn't adopt such an approach sooner. Mr. son actively opposed the idea that the government should directly invest in banks because he worried about picking winners and losers. He was also concerned banks wouldn't participate because of the perceived stigma and the potential for the government to meddle in their affairs, according to people familiar with the matter.

Instead, Treasury has marched ahead with a plan to buy distressed assets directly from banks.

House Democratic leaders, including Speaker Pelosi (D., Calif.) and House Financial Services Committee Chairman Barney , held a closed-door session Monday with 11 economists and other advisers, including Nobel laureate ph Stiglitz, to discuss the financial crisis. The group threw its weight behind Treasury's decision to inject capital into the banking system, in exchange for equity stakes.

"The consensus was so strong towards direct equity injections that there was literally no dissension on the point," said one of the invited economists, Bernstein of the liberal Economic Policy Institute. "The only head-scratching is why did it take us so long to get here?"

Officials at the Treasury and Federal Reserve have been looking for a comprehensive approach to the credit crisis after a series of ad hoc interventions and decisions. The government's various moves, from saving mortgage giants Fannie Mae and Freddie Mac to letting Lehman Brothers Holdings Inc. fail, have confused investors and frozen many in place at a time when the banking system was desperate for fresh capital. That contributed to what in essence was a high-level run on Wall Street banks, with funding drying up overnight and customers pulling away business.

The government's hope is that the new plan will more thoroughly address the problems of ailing financial institutions -- relating to their assets, liabilities and equity -- and will also persuade private investors that government involvement won't come at their expense.

For troubled assets there is the TARP program, created by the $700 billion bailout bill, which gives the Treasury Department authority to acquire bad assets from banks and other financial institutions. The TARP program will also be used by Treasury when it puts new equity into banks.

The other steps, including the FDIC's role in guaranteeing new funds raised by banks and thrifts, is designed to address the way banks fund themselves, freeing them to start lending again.

Many kinds of bank borrowing remain highly strained, most notably the short-term loans that banks make to each other to finance their day-to-day operations, known as interbank lending. This market is especially important, because it produces closely followed interest rates. The London interbank offered rate, or Libor, is a benchmark for many U.S. consumer and business loans.

"The guarantee means the debt holders don't run," said Anil Kashyap, a University of Chicago Business School economist.

Poole, former president of the Federal Reserve Bank of St. Louis, was a fierce critic of Treasury's initial plan to buy up distressed mortgage-backed securities. Such a scheme, he said, would lead banks to dump their worst assets on the taxpayers.

But Treasury's new tack may well do the trick, said Mr. Poole, now a senior fellow at the free-market-oriented Cato Institute.

"Investors need to be confident that the banks they're dealing with are unquestionably solvent, and it's in the interest of banks to assure investors that that's the case," Mr. Poole said. "One way banks can provide that assurance is to raise additional capital, in some combination of private and government capital."

Dean Baker, co-director of the left-of-center Center for Economic and Policy Research, said that the Treasury emphasis on recapitalization "makes an awful lot more sense" than the asset-purchase plan.

He argues that the country may have turned a corner on the financial panic -- the fear that has kept banks and investors from making even the most prudent loans. "I think we're through the worst on that," Mr. Baker said. "Maybe I'll be proven wrong, but it really was at an extreme last week."

There are costs associated with the new approach. The price of insuring against debt defaults rose for a number of European countries, reflecting rising concerns about how their plans will affect governments' finances. The cost of insuring against a default on £10 million in U.K. government debt for five years, for example, rose Monday to £47,000 annually, from £41,000 Friday. That in turn translates into higher borrowing costs for governments.

Moreover, blanket guarantees might inspire banks to take unnecessary risks, warned Frederic Mishkin, a Columbia University economist who stepped down as Fed governor in August. "You don't want to give a guarantee to banks that are in trouble" that might try to gamble their way out of problems, he said. He says offering broad guarantees will require that U.S. officials more aggressively act to sort out good banks from bad banks.

One sticking point could come from Congress, which wrote into the original bailout bill a requirement that Treasury tamp down executive pay at companies in which it invests. Rep. (D., Mass.) said Monday he wants the government to set conditions for any company that receives a capital injection.

"I don't want us to have voting rights, but I think we should have the ability to set enforceable conditions," he said. If Mr. son didn't enforce such rules, Mr. said the treasury secretary could be "making a big mistake."

Earlier Monday, Interim Assistant Secretary for Financial Stability Neel Kashkari provided more details about how Treasury would spend the bailout funds. He said Treasury tapped law firm Simpson Thacher & Bartlett LLP to provide advice on taking equity stakes in banks. The Treasury is also moving fast on its authority to buy illiquid assets from financial institutions, according to Mr. Kashkari, choosing consulting firm Ennis Knupp to help select asset managers for the program.

Speaking to an international banking group, Mr. Kashkari detailed several steps the Treasury had taken to ramp up the so-called Troubled Asset Relief Program in the last 10 days, conveying that it is working with utmost speed on the rescue effort.

"A program as large and complex as this would normally take months -- or even years -- to establish. We don't have months or years," Mr. Kashkari said.

More than 200 firms have applied to manage securities or whole loans under the program, he said.

Tom Bloom, CFO of the Comptroller of the Currency, will serve as interim chief financial officer. Fiechter, a senior official at the International Monetary Fund, will serve as interim chief risk officer.

Write to Deborah at deborah.solomon@..., Damian Paletta at damian.paletta@..., M. at michael.phillips@... and Jon Hilsenrath at jon.hilsenrath@...New MapQuest Local shows what's happening at your destination. Dining, Movies, Events, News more. Try it out!